hard · Private Credit underwriting-credit-analysis
A direct lender holds a $100M senior secured loan to a manufacturer. In a downside case, EBITDA falls to $14M, the loan amortizes at 1% annually, cash interest is $9M, maintenance capex is $4M, and a $3M working-capital build is needed to support a modest recovery in orders. The borrower has a $20M undrawn revolver (springing 7.0x net-leverage covenant, currently at 6.8x).
What is the binding constraint that most likely triggers a default first, and why?
- The springing leverage covenant on the revolver, because drawing to cover the cash shortfall pushes net leverage above 7.0x and trips the covenant before a payment is missed
- Cash interest coverage, since $14M of downside-case EBITDA comfortably exceeds the full $9M of annual cash interest expense, leaving the borrower solvent throughout
- Maintenance capex, because cutting the $4M of annual spend would meaningfully impair the productive asset base and directly breach the loan's capital-expenditure covenant
- The 1% amortization payment, because the mandatory $1M of scheduled principal is the very first contractual debt obligation the borrower cannot meet from available operating cash flow
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