This is a question more for LBO lenders than PE houses and I'm hoping others in the LBO lending market lurk here.
I've been thinking about ways to model downside cases for LBO lending/syndication based on a market where syndication appetite has tanked.
The most obvious approach I can think of is looking over the last ~8 years to when yields were at their highest, then using the highest monthly average yields for equivalent credits as a benchmark for what yield and price a lender would have to sell the debt at. I can then plug that yield onto the LBO debt I'm looking at to calculate the selling price, and from there the loss the lender will take (net of fees and after burning through OID and flex) to get the debt off its books. That then gives me a worse case scenario, albeit assuming that the market will not get worse than we've seen in the last few years. In most cases, I'd expect summer 2011 would end up being the benchmark.
Does anyone have any thoughts on other ways to approaching the question of how bad could it get purely from a syndication risk perspective?
There's a lot wrong with this approach. If you're in distressed / SSits you're going to be confronted with irrational sellers, are you constrained to be one too? Trying to see your downside case as a function of market prices is not the way to go at this. And using backward looking data, too.
I am slightly confused at what you're looking to achieve? If you want a downside interest expense, just plug in a low teens number. Refi risk is hard to analyse, so look at your recovery in restructuring. The syndicate market is changing so pretty hard to look backward to look forward with that too. The best way to asses it is talking to your contacts in the market, but that only gives you a snap shot of now. But it sort of seems like you're looking for a beta of a credit to poor market conditions without any consideration of the value of the company / like you expect to be a forced seller? I dunno.
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