CaseMark Conducting Institutional Credit Analysis
Structures credit underwriting with financial ratio analysis, cash flow quality assessment, and downside scenario modeling for leveraged lending, direct lending, and broadly syndicated credit facilities.
When To Use
- Underwriting a new term loan, revolving credit facility, or unitranche facility
- Evaluating borrower creditworthiness for a credit committee memo or credit opinion
- Re-underwriting an existing position after a material event (amendment, waiver, earnings miss)
- Conducting annual or quarterly portfolio credit reviews
- Stress-testing cash flows under downside or recovery scenarios for deal screening
Inputs To Gather
- Financial statements: Minimum 3 years of audited financials plus trailing LTM; interim quarterly statements if available
- Company-prepared adjustments: Management EBITDA add-backs, pro forma adjustments, and quality-of-earnings report (if available)
- Debt schedule: Full capital structure with maturities, pricing, covenants, and subordination/intercreditor terms
- Industry data: Sector benchmarks for leverage, margins, and cyclicality; comparable credit profiles
- Deal documents: Credit agreement (or draft term sheet), information memorandum, lender presentation
- Third-party reports: Rating agency reports, independent market studies, environmental/legal diligence summaries
Workflow
Map the capital structure
- Lay out all tranches: senior secured, second lien, mezzanine, holdco PIK, equity
- Calculate total leverage, senior secured leverage, net leverage, and first-lien leverage multiples
- Identify maturity profile, springing maturities, and refinancing walls
- Note intercreditor dynamics and structural subordination risks
Assess cash flow quality
- Recast EBITDA by evaluating each management add-back for reasonableness and recurrence
- Distinguish between maintenance capex and growth capex; compute free cash flow (FCF) and unlevered FCF
- Calculate cash conversion ratio (FCF / EBITDA) and assess working capital volatility
- Flag revenue concentration (customer, product, geography), contract vs. recurring vs. transactional revenue mix
- [VERIFY] Treatment of stock-based compensation, restructuring charges, and one-time items against lender-defined Consolidated EBITDA
Build financial ratio profile
- Compute key ratios: Total Debt / EBITDA, Senior Secured Debt / EBITDA, Interest Coverage (EBITDA / Cash Interest), Fixed Charge Coverage, Debt / Total Capitalization
- Benchmark ratios against sector medians and rating category thresholds (e.g., B2/B vs. B3/CCC)
- Trend ratios over LTM quarters to identify trajectory (improving, stable, deteriorating)
- [VERIFY] Covenant-defined calculation methodology vs. GAAP-based ratios — use credit agreement definitions where available
Model downside scenarios
- Base case: Management or consensus projections with independent revenue/margin assumptions
- Downside case: Revenue decline of 10–20% (or sector-appropriate stress); margin compression reflecting operating leverage and cost stickiness
- Severe/recovery case: Recessionary scenario calibrated to the worst historical period for the sector; test whether the borrower can service debt and maintain liquidity
- In each scenario, track covenant headroom, liquidity runway (months of cash + revolver availability), and whether amortization/mandatory prepayments can be met
- Estimate recovery value under a distressed scenario using enterprise value waterfall (EV / debt stack)
Evaluate qualitative credit factors
- Management track record, sponsor quality (if PE-backed), and governance structure
- Industry positioning: barriers to entry, competitive moat, regulatory risk, secular tailwinds/headwinds
- ESG and litigation exposures that could impair cash flow or enterprise value
- Assess event risk: M&A strategy, dividend recapitalization history, permitted investment baskets
Formulate credit opinion
- Assign an internal credit rating or risk score with supporting rationale
- State the investment thesis in 2–3 sentences: why the credit is acceptable (or not) at the proposed terms
- Identify the top 3–5 credit risks and corresponding mitigants
- Recommend approval, conditional approval (with structural enhancements), or decline
Output
The deliverable is a structured credit analysis containing:
- Executive summary: Borrower overview, transaction summary, proposed terms, and recommendation
- Capital structure table: All tranches with amounts, rates, maturities, leverage multiples, and key covenant thresholds
- Adjusted EBITDA bridge: Walk from reported EBITDA to underwritten EBITDA with line-by-line add-back commentary
- Financial ratio dashboard: Key credit metrics with historical trend, projections, and covenant levels
- Scenario summary table: Base, downside, and severe case outputs showing leverage, coverage, and liquidity by period
- Risk matrix: Top risks ranked by probability and severity with identified mitigants
- Credit recommendation: Internal rating, approval conditions (if any), and monitoring triggers
Quality Checks
- Confirm all add-backs tie to supporting documentation or are flagged with [VERIFY]
- Validate that leverage and coverage ratios use the correct denominator (credit agreement–defined EBITDA vs. GAAP EBITDA)
- Ensure downside scenarios reflect realistic operating leverage — costs should not flex linearly with revenue without justification
- Verify maturity dates, mandatory amortization schedules, and excess cash flow sweep percentages against the credit agreement
- Cross-check recovery analysis assumptions (exit multiple, asset values) against recent comparable transactions
- Confirm the credit opinion addresses all material risks identified during analysis — no orphaned risk without a mitigant or explicit acceptance
- [VERIFY] Regulatory and jurisdictional considerations: leveraged lending guidance thresholds (e.g., 6.0x total leverage), risk retention rules, and applicable banking regulations