Hi, when doing an LBO to determine whether to invest in a Senior Notes offering from the POV of a Private Credit fund, what should my sensitivity analysis look like?
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I would focus on sensitivity analyses around 1) asset coverage through the tranche you're underwriting and 2) key financial covenants such as Net Secured Debt / EBITDA and FCCR, or whatever the case may be. There are more things I'd look to sensitize, but for an initial look I'd focus on those two.
Thanks a lot! To clarify, you want to sensitize FCCR to what exactly, different levels of EBITDA? Something else?
EBITDA decline, revenue growth are good ones.
Like jckund mentioned, EBITDA and revenue growth are good ones, I also like to stress test incremental debt capacity baskets provided by the credit agreement to see where FCCR (and other metrics) breaks under different financing and EBITDA scenarios.
Adding on to this, for what projection period would you perform the sensitivity analysis? Let's say your model projects 5 years, would you run the sensitivity analysis at the midpoint and pick year 3? Year 5? Run a table for each year?
I think trying to sensitize something in year 3 and beyond is silly and non-value add. Sensitivities should be based on the pro forma cap structure / EBITDA metrics as of deal close and then perhaps over the NTM. You want to be able to point to any near term probabilities of liquidity issues or covenant non-compliance and be aware of what you might be dealing with soon after the deal closes because those are issues you can raise with advisors / counsel / sponsor etc to improve deal terms. No one is going to respond to an email with "hey our sensitivity analysis raised some questions over year 4 cash flows".
Hi guys does anyone have a good private credit case study then can share / PM on? would appreciate it and open to trading materials
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