casemark/preparing-credit-investment-memoranda

Preparing Credit Investment Memoranda

When To Use

• Presenting a new credit opportunity (leveraged loan, direct lending deal, distressed debt) to an investment committee or credit committee
• Documenting the rationale for a hold, increase, or exit decision on an existing credit position
• Preparing a formal write-up for a syndicated loan participation, club deal, or bilateral facility
• Building the analytical foundation for a credit rating recommendation or internal risk grade assignment

Inputs To Gather

• Borrower financials: Audited statements (3 years minimum), interim/quarterly results, management projections, and quality-of-earnings report if available
• Capital structure details: Existing debt stack with maturities, rates, covenants, and intercreditor terms; proposed new issuance terms
• Deal documents: Term sheet or commitment letter, credit agreement drafts, security/collateral descriptions, guarantor structure
• Industry context: Sector performance data, comparable company trading levels, relevant M&A or refinancing precedents
• Sponsor/ownership info: For leveraged deals—sponsor track record, equity contribution, co-invest structure, rollover equity
• Third-party reports: Appraisals, environmental assessments, insurance summaries, legal due diligence memos
• Relative value data: Secondary trading levels for comparable credits, new-issue spreads, index benchmarks (e.g., Morningstar LSTA, ICE BofA)

Workflow

1. Establish the investment thesis — State the recommendation (approve / pass / conditional approve) upfront. Summarize the credit in one paragraph: borrower, purpose, structure, key attraction, and primary risk.

2. Profile the borrower — Cover business description, revenue model, end-market exposure, competitive positioning, management quality, and ownership history. Quantify market share and customer/supplier concentration where data permits.

3. Analyze financial performance — Present historical and projected income statement, cash flow, and balance sheet metrics. Focus on:

   • Revenue growth trajectory and margin stability
   • Adjusted EBITDA and addback scrutiny (flag aggressive addbacks explicitly)
   • Free cash flow generation and conversion rate
   • Capex requirements (maintenance vs. growth)
   • Working capital seasonality and trends

4. Evaluate the capital structure — Map the full debt stack with amounts, pricing, maturity, and ranking. Calculate key credit metrics at close and across the projection period:

   • Total leverage / Senior secured leverage / Net leverage
   • Interest coverage (EBITDA / cash interest) and fixed charge coverage
   • Loan-to-value based on enterprise value or collateral appraisal
   • Debt / equity contribution split for LBO or acquisition financings

5. Assess deal structure and documentation — Evaluate covenant package (maintenance vs. incurrence), EBITDA definition and addback caps, restricted payments and debt baskets, change-of-control provisions, and call protection. Flag any covenant-lite features or unusual borrower-friendly terms.

6. Conduct risk analysis — Organize risks into categories:

   • Business risk: cyclicality, customer concentration, regulatory exposure, technology disruption
   • Financial risk: leverage trajectory, refinancing risk, liquidity adequacy, FX/interest rate exposure
   • Structural risk: subordination, collateral leakage, guarantor coverage gaps
   • Downside scenario: Model a stress case (e.g., revenue decline of 15–25%) and show resulting leverage, coverage, and liquidity runway. Estimate recovery in a default scenario using collateral and enterprise value approaches.

7. Position relative value — Compare spread, yield, leverage, and coverage metrics against a peer set of 4–6 comparable credits. Reference recent primary market prints and secondary trading levels. State whether the proposed pricing compensates adequately for incremental risk versus alternatives.

8. State the recommendation — Reaffirm or refine the upfront recommendation. Specify conditions or mitigants (e.g., tighter covenant, lower hold size, required hedge) if approval is conditional.

Output

The memo should follow this structure:

1. Executive Summary & Recommendation — One page maximum; includes deal terms table (borrower, facility, amount, rate, maturity, security, leverage at close)
2. Borrower Overview — Business, industry, ownership, management
3. Financial Analysis — Historical/projected metrics, EBITDA bridge, cash flow waterfall
4. Capital Structure & Terms — Debt stack table, covenant summary, documentation highlights
5. Risk Assessment — Categorized risks with mitigants; downside/stress scenario output
6. Relative Value — Comp table with spread, leverage, coverage; market context
7. Recommendation & Conditions — Final recommendation with any conditions precedent
8. Appendices — Detailed financial model outputs, org chart, collateral description, comp sheets

Use tables for deal terms, debt stack, financial projections, and relative value comps. Present metrics to one decimal place. Clearly label adjusted vs. reported figures.

Quality Checks

• [ ] Recommendation is stated in the first paragraph and reiterated at close
• [ ] All EBITDA addbacks are individually identified and scrutinized for reasonableness
• [ ] Leverage and coverage metrics are calculated on both a gross and net basis
• [ ] Stress/downside case is modeled with explicit assumptions, not just directional commentary
• [ ] Recovery analysis uses at least one methodology (enterprise value waterfall or collateral-based)
• [ ] Relative value comp set includes minimum 4 credits with consistent metric definitions
• [ ] Covenant analysis addresses maintenance tests, incurrence tests, and key baskets
• [ ] All projections sourced (management case vs. analyst case) are clearly labeled
• [ ] Marks any unverified data points, sponsor-provided figures, or management-only projections with [VERIFY]
• [ ] No internal credit ratings, fund position sizes, or portfolio-level data are included unless appropriate for the audience