casemark/analyzing-leveraged-loans

Analyzing Leveraged Loans

Structures leveraged loan analysis covering credit facility terms, covenant packages, amendment activity, repricing risk, and relative value positioning within the broadly syndicated and middle-market loan universe.

When To Use

• Evaluating a new leveraged loan for purchase or participation in primary syndication
• Reviewing an existing portfolio holding after an amendment, repricing, or credit event
• Comparing covenant packages across issuers or vintages
• Assessing repricing and refinancing risk for floating-rate loan positions
• Analyzing CLO eligibility and secondary market liquidity for a given facility

Inputs To Gather

• Credit agreement or term sheet — full document or summary of key terms (facility size, maturity, spread, OID, floor, call protection)
• Financial statements — at least two periods of income statement, balance sheet, and cash flow to compute leverage and coverage metrics
• Amendment/waiver history — any consent solicitations, repricings, or covenant modifications since closing
• Market data — current bid/ask levels, loan index spreads (e.g., Morningstar LSTA index), and comparable loan pricing
• Rating agency reports — facility and corporate family ratings from Moody's/S&P/Fitch, including outlooks
• Borrower context — industry, sponsor (if PE-backed), capital structure diagram, and any pending M&A or dividend recap activity

Workflow

1. Map the capital structure — Identify all debt tranches (revolver, TL-A, TL-B, second lien, unsecured), their relative priority, and any structural subordination across entities. Calculate attachment and detachment points for loss-given-default estimation.

2. Compute credit metrics — Calculate Total Debt / EBITDA, Secured Debt / EBITDA, Interest Coverage (EBITDA / Cash Interest), and Fixed Charge Coverage. Use both reported EBITDA and an adjusted figure that strips out non-recurring add-backs. Flag add-backs exceeding 20-25% of unadjusted EBITDA as aggressive. [VERIFY] whether the credit agreement uses a trailing, pro forma, or run-rate EBITDA definition.

3. Analyze the covenant package — Determine whether the loan is covenant-lite (incurrence-only) or has maintenance covenants. For cov-lite deals, review:

   • Restricted payments and debt incurrence baskets (fixed-dollar vs. ratio-based)
   • Permitted investments and the "Available Amount" builder basket
   • Asset sale sweep percentages and reinvestment periods
   • Change-of-control provisions and portability language
   • J. Crew / Chewy-style trapdoor provisions allowing IP or asset transfers to unrestricted subsidiaries

4. Assess amendment and repricing history — Review any amendments since closing: covenant holidays, EBITDA definition changes, basket expansions, maturity extensions, or spread reductions. Evaluate whether amendments were borrower-friendly erosions or neutral technical fixes. Note any "amend-and-extend" transactions and the resulting maturity profile.

5. Evaluate repricing and call risk — Check soft-call protection periods (typically 6-12 months at 101). Assess likelihood of repricing given current spread relative to new-issue clearing levels. A loan trading above par with spread significantly above the current market for comparable credits has elevated repricing risk, compressing upside.

6. Run relative value comparison — Compare spread, OID, leverage, rating, and sector against a peer set of 5-10 comparable loans. Compute spread-per-turn-of-leverage to normalize value across different capital structures. Assess whether the loan prices to its rating, or if a dislocation exists.

7. Evaluate CLO and technical factors — Determine CLO eligibility (CCC bucket limits, minimum spread/coupon tests, weighted average life constraints). Assess whether the borrower is a frequent CLO holding, which supports secondary liquidity. Note upcoming CLO reinvestment period expirations that could reduce demand.

Output

Produce a structured leveraged loan analysis containing:

• Executive summary — One-paragraph investment thesis: buy/hold/sell recommendation with key drivers
• Capital structure table — All tranches with size, rate, maturity, and priority
• Credit metrics dashboard — Leverage, coverage, and free cash flow metrics over the last 2-4 quarters with trend arrows
• Covenant scorecard — Red/yellow/green assessment of key basket and provision quality relative to market norms
• Amendment timeline — Chronological list of material amendments with borrower-impact assessment
• Repricing risk gauge — Low/medium/high based on call protection status, spread-to-market gap, and borrower credit trajectory
• Relative value matrix — Peer comparison table with spread, leverage, rating, and spread-per-turn
• Risk factors — Top 3-5 downside catalysts (earnings deterioration, sponsor dividend, sector headwinds, refinancing wall)

Quality Checks

• Verify that EBITDA adjustments reconcile to the credit agreement's defined add-backs, not management's investor presentation figures
• Confirm leverage calculations use the same netting conventions (gross vs. net of cash) as the covenant definitions
• Cross-check market pricing against at least two sources (e.g., MarketAxess, LSTA/LPC, dealer runs) [VERIFY]
• Ensure amendment analysis references the actual amendment text, not just press coverage or rating agency summaries
• Validate that CLO eligibility assessment reflects current Volcker and risk-retention requirements [VERIFY]
• Flag any situation where the borrower is approaching the outer edge of incurrence baskets, as this may signal future aggressive liability management