Executive summary
A private-credit underwriting case should begin with the borrower’s ability to preserve liquidity when the operating plan misses—not with the leverage multiple in the sponsor’s base case. I use a sequence that connects cash conversion, debt service, covenant headroom, documentation and recoverable value.
The downside case is the underwriting case. The base case explains return; the downside case explains whether capital comes back.
Underwriting sequence
I would work through the credit in this order:
- Normalise EBITDA for items that are genuinely non-recurring and remove unsupported add-backs.
- Rebuild cash flow after cash tax, capital expenditure, working capital and recurring restructuring cost.
- Map contractual interest, amortisation, maturities and minimum-liquidity needs.
- Identify maintenance tests, baskets, cure rights and leakage permitted by the documents.
- Stress operating performance and the timing of management actions.
- Estimate recovery from enterprise value and asset value without assuming an orderly sale.
The sequence prevents a comfortable starting leverage ratio from masking poor cash conversion or weak lender control.
Downside case
The stress should be operationally specific. A revenue decline may reduce gross profit, but working capital can move in either direction depending on inventory and collections. Cost actions take time and often require cash before savings appear. The model should show monthly or quarterly liquidity through that transition rather than jump directly from stressed EBITDA to a year-end leverage ratio.
Recovery analysis should also distinguish going-concern value from readily realisable asset value. A multiple applied to trough earnings is not conservative merely because the multiple is low; the earnings base and sale timing must also be credible.
Documentation
Economic protection and documentary protection are related but not interchangeable. I would record definitions, calculation flexibility, permitted debt, restricted-payment capacity, collateral coverage and transfer rights beside the numerical case. Headroom that depends on an aggressive EBITDA definition is not the same as headroom generated by cash deleveraging.