medium · Private Credit loan-structures-instruments
A direct lender is underwriting a 'Software-as-a-Service' (SaaS) business with high recurring revenue but negative GAAP EBITDA. The lender uses a 'Debt to Recurring Revenue' covenant.
What is the most critical risk for the lender in this structure?
- The company's Depreciation and Amortization charges will spike, leading to a breach of the interest coverage ratio.
- The company may exhaust its cash runway before achieving profitability, making the revenue base unsalable.
- The SOFR base rate will decline, reducing the lender's income yield from the floating-rate loan.
- The lender will be unable to perfect a security interest in the company's physical inventory.
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