Underwriting Downside Risk in Direct Lending & Private Credit
Examining cash conversion, covenant headroom, and debt service capacity under sustained interest rate and inflationary pressure.
1. True Cash Conversion vs. Adjusted EBITDA
The widespread use of aggressive EBITDA adjustments—such as future synergy add-backs, run-rate cost savings, and capitalized software adjustments—frequently creates an illusion of low pro-forma leverage. In private credit underwriting, analysts must strip out non-cash and speculative adjustments to evaluate genuine historical cash generation.
Working capital volatility and maintenance capital expenditure requirements must be analyzed across cyclical downturns. A business that appears modestly levered on EBITDA can quickly face liquidity distress if working capital absorbs significant cash during revenue slowdowns.
2. Covenant Headroom and Structural Protections
In an environment where covenant-lite documentation has proliferated, credit analysts must scrutinize debt basket flexibility, dividend leakage rules, and unrestricted subsidiary transfer rights. Lenders must understand not just where covenants are set today, but whether borrower management has the legal flexibility to incur senior priming debt.
3. Stress Testing and Recovery Analysis
Every credit memorandum should include comprehensive stress-testing that evaluates debt-service coverage under simultaneous margin contraction and elevated borrowing costs. Liquidation recovery waterfalls should model realistic enterprise value haircuts based on precedent restructuring outcomes.
Summary Takeaway
Effective credit research provides lenders with the analytical clarity required to price risk accurately and negotiate meaningful structural protections. Asterion delivers independent issuer analysis across public and private debt markets.
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