Interested in learning about what types of modeling are commonly used in private credit. What types of valuation methods are involved? Assuming LBO but curious to see what else is used.
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Why wouldn't there be valuation involved? Would you lend against something without understanding what its worth?
LBO modelling is one thing.. but cash flow modelling at a fundamental lever.. take any public/private company and trying to understand their FCF. Debt structuring is essential PV of CF for the IRR you need and running sensitivities around the assumption
Hi,
I am facing a case study for a credit fund.
Could you share any case study you have done previously please?
Thank you in advance!
Hi! Were you able to gather any private credit case studies you'd be willing to share for interview prep? Thanks!
Modeling for PC primary focused on LBO with cash flow and resultant applicable debt service coverage / leverage at the different tranches over the course of the investment period. Since returns aren't valuation driven in a normal case, valuation analysis is more focused on the downside. Goal with valuation process is to determine whether or not your debt will be covered. For example, if you are a 1L lender, and the company is leveraged to 5.5x through the 1L, as long as distressed value is above 5.5x you should theoretically be covered, even though the 2L, subordinated, and equity gets wiped. It's quite a bit more complicated than that in reality, but you get the picture.
PC modelling at a plain vanilla DL fund is basically typical LBO modelling just without the equity return part (unless your PC fund also invests in pref. equity or mezz/warrants).
You just want to see how leverage ratios and loan-to-value (i.e., classic valuation is essential) evolve in stress cases and how your debt servicing looks like.
You receive an IM from the sell-side and your job as an Analyst / Associate is to link the model on your Excel template. Every Private Credit shop will have its own template where they will do their LBO analysws.
Realistically, you won't touch the operating model, you will mainly look at essential line items like Revenue, Gross Profit, EBITDA, FCF, etc. and make downward cases, i.e., what are some realistic downward cases in case management does not hit consensus? You will usually look at the Business Plan and make scenarios of this, usually, you will discuss this with your VP.
There is usually no such thing as return analysis etc. You instead focus on Credit metrics like DSCR, leverage ratios and so forth and analyse how they look over time, i.e. is the company able to de-lever over time?
Likewise, the way you calculate FCF is also a bit different. At most credit firms you will need to know how to get to CFADS, if you have never done Credit before and first time interviewing it can be tricky.
To be honest, Private Credit "modellng" is probably the easiest part of the model and its honesty copy paste from the sell-side model. They are not that prudent, and no one actually cares about it. At my firm we just do it just for the sake of putting it on our IC, no one actually cares or will ever have a look.
Are you telling me that the vanilla private credit firms do not do a returns analysis to see the IRR/MOIC of their debt security? Returns analysis for credit is extremely relevant if there are things like prepayments, rate step-ups, etc. The realized IRR of a loan can vary from the day 1 YTM.
At my firm, we don't do this manually, it's neither part of our modeling. We have a quant team that does this for us, they have developed a system where we just input key inputs of the investment and it spits out levered / unlevered IRR.
Aware that this part may be firm dependent
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