Credit deck

Question 1

What’s the difference between bank debt and HY debt?

Answer 1

Bank debt:
- FFR + spread
- maintenance convenants
- usually collateralized
- usually periodic payments

HY debt:
- usually fixed rate
- limitation covenants
- unsecured
- bullet repayment

Question 2

How do you evaluate if a company’s debtworthy?

Answer 2

1. Character: borrower reputation, credit history
2. Capacity: ability to repay debt, thru coverage ratios
3. Capital: amount of money the borrower has invested in their business, ‘skin in the game’ i.e. equity contribution, D to E ratio, RE
4. Collateral: assets that can be seized upon default
5. Conditions: terms of the loan, broader economic landscape, industry environment

Question 3

Name the tranches of debt

Answer 3

Senior secured:
- revolver
- term loan ABCD
Senior unsecured:
- HY
- senior notes
Junior unsecured:
- subordinated notes
- mezzanine financing

Question 4

How would you price a loan?

Answer 4

Risk free rate
+ credit spread - based on borrower’s financial profile and industry characteristics
+ liquidity premium, considering if there are secondary markets
+ lender cost and profit margin, considering how much to charge to make a certain IRR

Question 5

Tell me about the different attributes of a loan

Answer 5

Interest rate
tenor/maturity period
investors
seniority
collateral
covenants
prepayment (no call protection)

Question 5

How can you determine how much Debt a PE firm might use in an LBO and how many tranches
there would be?

Answer 5

You look at recent, similar LBOs and use the median Debt / EBITDA levels from them as
references; you could also look at highly leveraged public companies in the industry and check
their Debt / EBITDA levels.

test these assumptions by projecting the company’s leverage and coverage ratios over time

Question 6

List some leverage and coverage ratios

Answer 6

Debt to EBITDA
Debt to equity
Debt to assets

EBIT/interest expense