Private Credit Case On LBO Lending
This conversation was generated using Cook'd AI's career assistant and reviewed by Fallon Han from our editorial team for accuracy.
I want a case where the first task is to decide whether to lend and on what terms. Make it feel like an investment committee discussion for a sponsor-backed LBO at a direct lender in Chicago.
Absolutely. Here is a realistic setup. You are an MBA graduate in Chicago, moving from consulting into private credit at a direct lender. The sponsor wants a senior secured unitranche for a levered buyout of a business services company. Your first job is to decide yes or no, then size the hold, price, and key covenant protections. I will challenge you on leverage, cash flow quality, downside protection, and how you would frame the credit memo to an investment committee.
Great. I would start by asking for the financial model, sponsor materials, customer concentration, and debt schedule. Then I would want to understand whether this business has stable recurring revenue, how cyclical it is, and what the exit multiple might be.
Good start. In the case, the company has 70 percent recurring revenue, low customer concentration, and modest cyclicality. Entry leverage is 5.5 times EBITDA, and the sponsor wants 4.5 times senior debt with 1.0 times equity cushion. However, working capital needs can swing in a downturn, and maintenance capex is higher than management suggests. What would you say on lend or no lend, and what terms would you push for?
I would be cautiously supportive, but only if the downside is protected. I would want tighter leverage than the sponsor asked for, likely lower advance rates or a smaller hold, plus a first lien structure with a meaningful equity contribution. I would also push for a springing maintenance covenant, a minimum liquidity test, and restrictions on add-back adjustments if EBITDA looks aggressive.
That is the right direction. To sharpen it: the sponsor is asking for covenant-lite terms, but your committee is conservative. The business can withstand some leverage, yet the cash flow is not bulletproof. A strong answer would explain whether you would decline, or lend with specific guardrails such as lower leverage, tighter baskets, limited synergies in EBITDA, no unlimited permitted debt, and quarterly reporting. How would you defend the pricing and covenant package to the committee?
I would defend lending if pricing compensates for the risk and if the structure gives us control in a downside. I would argue for a higher margin than a plain-vanilla sponsor deal because the company has working capital volatility and elevated capex. On covenants, I would prefer a springing leverage covenant tied to revolver usage, plus mandatory prepayments from excess cash flow and asset sales. I would say the package should let us catch deterioration early rather than wait for a default.
Strong answer. For an investment committee, I would want you to be even more explicit: summarize the credit thesis in one minute, name the two biggest risks, and state the exact structural mitigants. The best version would sound like this: resilient revenue supports underwriting, but leverage and cash conversion are the stress points, so we require lower leverage, tight documentation, restricted baskets, and maintenance protection if performance weakens. That is the level of clarity expected in a direct lending seat.