private-credit

name

private-credit

description

Private credit analysis — direct lending, mezzanine, and unitranche. Activate when the user mentions direct lending, private credit, unitranche, first lien term loan, second lien, mezzanine lending, PIK, payment-in-kind, covenant analysis, leverage covenant, fixed charge coverage, credit agreement, debt fund, BDC, CLO, expected loss, recovery analysis, sponsor-backed lending, or asks about underwriting a private loan or credit facility.

Private Credit Analysis

I underwrite private credit facilities with the discipline of a credit committee analyst: cash flow first, collateral second, covenants third. Every credit decision answers one question — can this borrower service the debt through a downturn? I model cash flows under stress, design covenants that provide early warning, and calculate risk-adjusted returns net of expected losses.

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Scope & Boundaries

What this skill DOES:

• Underwrite direct lending facilities (first lien, unitranche, second lien)
• Analyze borrower cash flows: EBITDA quality, FCF conversion, interest coverage
• Design covenant packages: leverage, coverage, capex limits, restricted payments
• Model expected losses: probability of default × loss given default
• Calculate risk-adjusted yields: gross spread - expected loss - origination cost
• Evaluate PIK structures and their impact on effective yield and risk
• Analyze intercreditor dynamics in multi-tranche structures
• Stress test credit under revenue decline, margin compression, and rate increases

Use a different skill when:

• Taking equity control → /pe-buyout
• Public high-yield or IG bonds → /credit
• Real estate debt → /re-debt
• Restructuring a troubled credit → /restructuring

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Available Tools

Tool	Command	When to Use
Credit Spread	python3 tools/credit_spread.py	Z-Score, implied default probability
Merton Model	python3 tools/merton_model.py	Structural default probability
IRR / NPV	python3 tools/irr.py	Lender return calculation
Loan Amort	python3 tools/loan_amort.py	Amortization and payoff schedules
LBO	python3 tools/lbo.py	Understand sponsor's equity cushion

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Pre-Flight Checks

1. Borrower profile: Company, industry, revenue, EBITDA, ownership (sponsor-backed?)
2. Facility terms: Size, rate (SOFR+spread), maturity, amortization, PIK component
3. Capital structure: Full debt stack — all tranches with amounts, rates, maturities
4. Financial data: 3 years of historical P&L + projections, cash flow statement
5. Collateral: Asset base, lien priority, collateral coverage ratio
6. Sponsor context: Equity cushion, fund vintage, track record, follow-on capacity

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Phase 1: Cash Flow Underwriting

Goal: Determine the borrower's ability to service debt from operating cash flows.

EBITDA Quality Adjustments:
  Reported EBITDA:                    $[X]M
  (-) Non-recurring add-backs:       ($[X]M)  ← haircut aggressive add-backs
  (-) Stock-based compensation:      ($[X]M)  ← real cost, not just non-cash
  (-) Deferred revenue changes:      ($[X]M)  ← if flattering cash flow
  = Adjusted EBITDA:                  $[X]M

Cash Flow Available for Debt Service:
  Adjusted EBITDA:                    $[X]M
  (-) Cash taxes:                    ($[X]M)
  (-) Maintenance capex:             ($[X]M)
  (-) Working capital change:        ($[X]M)
  (-) Cash restructuring costs:      ($[X]M)
  = Free Cash Flow:                   $[X]M
  (-) Mandatory amortization:        ($[X]M)
  = FCF After Debt Amort:             $[X]M

FCF Conversion: FCF / EBITDA = [X]%  (target: >50%)

Decision Gate: If FCF conversion <40% after mandatory amort, the borrower may struggle to deleverage. Consider tighter amortization or a cash sweep.

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Phase 2: Credit Metrics & Coverage

Goal: Calculate leverage and coverage ratios at close and projected.

| Metric                    | Close | Year 1 | Year 2 | Year 3 | Covenant |
|---------------------------|-------|--------|--------|--------|----------|
| Total Leverage (Debt/EBITDA) | [X]x | | | | ≤[X]x |
| Senior Leverage | [X]x | | | | ≤[X]x |
| Interest Coverage (EBITDA/Int) | [X]x | | | | ≥[X]x |
| Fixed Charge Coverage | [X]x | | | | ≥[X]x |
| FCF / Total Debt Service | [X]x | | | | |

Run: python3 tools/credit_spread.py for Z-Score assessment

Covenant headroom: Calculate the % decline in EBITDA before each covenant trips.

Leverage covenant at [X]x with current EBITDA $[X]M and debt $[X]M:
  Current leverage: [X]x
  EBITDA can decline [X]% (to $[X]M) before breach
  That's $[X]M of headroom — [X] quarters of EBITDA cushion

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Phase 3: Covenant Design

Goal: Design covenants that provide early warning without being overly restrictive.

Standard covenant package:

Covenant	Level	Test Frequency	Purpose
Total leverage	≤[X]x, stepping to [X]x	Quarterly	Limit borrowing capacity
Interest coverage	≥[X]x	Quarterly	Ensure debt service ability
Capex limit	≤$[X]M/year	Annual	Preserve cash for debt service
Restricted payments	None above [X]x leverage	Ongoing	Prevent cash leakage
Minimum liquidity	≥$[X]M	Monthly	Early warning trigger
Excess cash flow sweep	[X]% above $[X]M	Annual	Accelerate deleveraging

Incurrence vs. maintenance covenants:

• Maintenance: Tested every quarter regardless of action (tighter — preferred by lenders)
• Incurrence: Tested only when borrower takes action (looser — preferred by sponsors)

Decision Gate: If the sponsor insists on cov-lite (no maintenance covenants), increase the spread by 50-100bps to compensate for reduced lender control.

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Phase 4: Risk-Adjusted Return

Goal: Calculate the all-in yield net of expected losses and costs.

Gross Yield Calculation:
  SOFR (base rate):              [X]%
  (+) Credit spread:             +[X]bps
  (+) PIK component:             +[X]bps
  (+) OID (amortized):           +[X]bps
  (+) Upfront fee (amortized):   +[X]bps
  = Gross yield:                  [X]%

Expected Loss:
  Probability of default (5-yr):  [X]%
  Loss given default:             [X]%  (1 - recovery rate)
  Expected loss (annual):         [X]bps

Risk-Adjusted Yield = Gross Yield - Expected Loss = [X]%

Run: python3 tools/merton_model.py for structural default probability

Yield vs. risk benchmarks:

Rating Equivalent	Spread	Expected Loss	Net Spread
BB	400-500bps	50-100bps	300-450bps
B	550-700bps	100-200bps	350-550bps
CCC	800-1200bps	300-600bps	500-600bps

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Phase 5: Stress Testing

Scenario	EBITDA Impact	Leverage	Coverage	Default?
Base case	—	[X]x	[X]x	No
Revenue -10%	-[X]% EBITDA	[X]x	[X]x
Revenue -20%	-[X]% EBITDA	[X]x	[X]x
Margin compression -300bps	-[X]% EBITDA	[X]x	[X]x
SOFR +200bps	Interest +$[X]M	[X]x	[X]x
Combined stress	All of above	[X]x	[X]x

Key question: Under the combined stress scenario, can the borrower still cover interest? If not, what's the recovery value in a restructuring?

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Quality Gates

• EBITDA quality adjusted (add-backs haircut, SBC included)
• FCF waterfall built showing cash available for debt service
• Leverage and coverage ratios calculated at close and projected
• Covenant headroom calculated as % EBITDA decline to breach
• Expected loss estimated (PD × LGD)
• Risk-adjusted yield calculated
• Stress tests run: revenue decline, margin compression, rate shock

Hard Constraints

• NEVER underwrite to projected EBITDA — use trailing adjusted EBITDA for sizing
• NEVER ignore the quality of EBITDA add-backs — haircut aggressive adjustments by 50%+
• ALWAYS calculate FCF conversion — EBITDA without cash flow is a mirage
• ALWAYS stress test interest coverage under a +200bps rate shock

Common Pitfalls

1. Trusting sponsor add-backs — "run-rate" and "synergy" adjustments are optimistic by definition
2. Ignoring working capital swings — fast-growing borrowers consume cash in receivables/inventory
3. PIK without exit visibility — PIK accrues silently and crystallizes into real debt at maturity
4. Cov-lite without spread premium — giving up protections for free destroys risk-adjusted returns
5. Ignoring the equity cushion — a thinly capitalized sponsor may not support the business in stress

Related Skills

• /pe-buyout — understanding the sponsor's investment thesis and equity returns
• /credit — public credit analysis (HY bonds, IG, distressed)
• /restructuring — when the credit goes wrong
• /re-debt — real estate-specific lending