Is this normal for a private credit case study?
I was ask to put together a 5-15 page investment memo, which is normal. However, I also need to put together a full blown DCF, Comparable, Credit Analysis Model with sensitized case. The biggest problem is the lack of info, I was given a old CIM by Evercore and there's no F/S, just some EBITDA calculation and projected growth. I'm supposed to figure out a potential acquisition price on the deal and then decide whether I want to invest in the Unitranche, 1st /2nd lien debt? Honestly everything is easy to do, but the lack of information of the financial makes it hard. How am I suppose to assumptions on cash taxes, interest and change in NWC? WACC? This is a private company and trying to get the information is probably the hardest thing out of the case study.
Following
is it in an obscure industry / have a particularly esoteric business model? if not, i'd probably make some basic assumptions based on publicly available information from comps. will take a bit of time to grab the information, but if you're at a bank this sort of stuff is probably already on hand to some extent.
these assumptions will probably be at the absolute best ball partk correct, but if they're well enough thought out given the info on hand and the rest of the analysis on top of the assumptions is solid then probably won't make or break the case. doubt there's one "correct" answer they're looking for
To add to this, if you're expected to write a 5-15 page long form memo, that seems like a reasonable amount of financial analysis to support your conclusions/recommendations.
In terms of the assumptions on interest, NWC, WACC, etc., those should be guided from your comps and flow into your DCF and credit analysis. You'll be able to see what leverage the companies generally take on and at what spreads, and then when that gets built into the model, you'll get a sense for which tranche of debt you'd want to invest in (also make sure to account for wider spreads in private vs public debt). For NWC, do you have any historical data? If so, you could take that as a percentage of revenue, otherwise you could rely on comps.
At the end of the day, if you weren't given certain assumptions, you'll need to rely on what you can pull together from the market.
Agree with all the above. If you have top line and growth assumptions, EBITDA, and likely a capex forecast it should be straight forward to build the rest via comps.
Thanks yall this is super helpful. After doing some research the company was purchased by MM PE for 14x ev/EBITDA multiple. I'm planning to propose a cap structure of 3.5x EBITDA 1st lien @ 3.5% and 7x EBITDA 2nd lien @ 7%? Debt repayment comes back to pay off 100% of 1st lien or 87% of total debt. Sensitized case comes back to pay off only 70-80% of 1st lien or ~40% of total debt. Should I propose a unitranche or just invest in the 1st lien?
Sounds like a shitco
The answer is going to depend on the fund's investment strategy, if you're the sole lender, and the size of the company. Fees on a unitranche are likely going to be lower as they can be executed faster and there's only one credit agreement, which will matter if you're looking at MM or lower. Also if you're looking at a 1st lien/2nd lien structure and planning to invest in 1st lien, you'll probably get a higher rate of interest on the debt at the expense of potentially having less security on the loan. If you think that the company is going to default, there are multiple lenders, and they can afford it, it probably makes more sense to get a 1st lien loan, but without having done the analysis or knowing the exact details it's difficult to say with any certainty.
Given that lender's return are capped, shouldn't I just invest in the tranche with 100% repayment. The only source of capital is sole lender 1st lien and 2nd lien plus the sponsor equity, so the company dont have a deep capital structure. Small LMM size company in SaaS. I'm just trying to understand what should I look for to put together a strong investment thesis? The company meets covenant in both management and sensitized debt repayment case.
Hi - I'm in special situations mandate. Regarding your structuring - unitranche is quite rare (tho was trendy in Australia for some point) so would suggest 1L / 2L. Would try 1L (0-5x, L+350), 2L (5-7x, L+750), if you are in direct lending, can weave in a pref on top of that since the business is 14x. So like a perp pref going 7-8.5x at L+1050. As direct lender, 2L or pref would be good options for yield - I would personally prefer to do a pref here. For metrics, would show LTV and attach/detach over time as company delevers (e.g. by LTV I mean like 2L leverage / TEV multiple, pref leverage / TEV multiple), among other stuff. Good luck -
Hi, can you please elaborate on the attachment/detachment over time? an example would be insanely appreciated!
The bad news is this is literally your daily job if you’re in PC lol - especially on the non-sponsor side, it’s pulling hair constantly with shizzy info. In general though you can cheese it ie assume nwc is x percent of revenue, etc). Don’t overdo the model, no three statement nonsense, just a levered fcf model is all people care about. Dcfs aren’t a skill, they’re an output from the fcf model above, it’s like ten lines of excel
Lmk if any other questions though, would say to honestly take your best stab at it. More important part is cohesively presenting it and having a logical thesis. They’re not expecting you to know the answers but rather know how to think and what questions to ask
Yeesh, sounds like they’re trying to squeeze out free work already. Hope you didn’t sign an NDA!
It’s a old CIM, I was able to find some info on the transaction through refinitiv, LCD and stuff. Just impossible to do it if you don’t have these resource handy. Curious to hear peoples feed back on your key points for a investment thesis and how would you determine which tranche of debt to invest in?
It’s a old CIM, I was able to find some info on the transaction through refinitiv, LCD and stuff. Just impossible to do it if you don’t have these resource handy. Curious to hear peoples feed back on your key points for a investment thesis and how would you determine which tranche of debt to invest in?
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