Private Credit Resources and Prep

You're right, there are essentially no solid private credit recruiting courses out there. Prepping for private credit interviews will essentially be the same as PE, however, there are three concepts that you'll need to touch on in private credit-specific cases that you won't normally include in a PE case. PM me if you want a reference case, model or have other questions.

1. Debt Comps (to determine coupon rate and covenants) - See "Additional Note" Below for More Details

A common framework for a private credit case study is to provide an LBO case study, then ask the candidate what amount of debt and level of leverage would be reasonable, and what interest rate you'd charge.

You'll actually need to make an LBO model to solve the case, however, you won't include equity returns, and will instead use the model to help illustrate the debt capacity of the business. What really matters here is to be able to back up your assumptions. Follow the below steps to create assumptions that will be viewed favorably by the interviewing committee at a private credit firm:

1) Create a list of public comparable companies (you'll want between 5-10 of these)

2) Spread each company's capital structure (e.g. amount drawn on the revolver, outstanding term loans or bonds, etc.) and calculate their leverage ratio based on Adjusted EBITDA, which should be provided in the latest filings. If it isn't in the SEC filings, then check the latest quarterly press release on the company's website, as that likely has an Adjusted EBITDA figure

3) Create a table that shows the interest rate of each piece of debt in the comparable companies' capital structures. This will help inform the interest rate you choose on the debt investment you recommend

4) You'll also want to analyze the covenant packages includes in the credit agreements. If you're doing a private credit case study, you're likely going to recommend a term loan-like instrument, so I'd hone in on what covenants have been included in recently issued term loans. To find this, you can do two things: 1) go to the long-term debt section of the company's latest filing, it will usually provide a date for the latest term loan issuance. Some filings include the credit agreements or indentures as exhibits at the back of the file, so check the end of the filing to see if you can find those agreements there. If you can't find the credit agreement or indenture there, then look for an 8-K that was released on the day of the debt instruments issuance, and you'll probably find a file document that includes either the credit agreement or indenture. These are usually crazy long, so I'd focus on the negative covenant section of the document, which typically includes the financial maintenance covenants. You can then look at what covenants are included in comparable debt packages to inform which covenant you should include in your investment recommendation.

P.S. - It just dawned on me that many companies' 10K/10Q include a "Covenant" section. Tbh check that before going through the whole process of reading a credit agreement as it will be way faster 

If your case study includes a post-case debrief, the above will help prepare you to answer questions like "how did you determine this interest rate was appropriate?", "why did you choose these covenants" and "how are competitors financing their businesses?" 

2. Equity Cushion Calc

After spreading the comps above, you'll use them again, but this time you'll be focused on creating a historical EBITDA multiple valuation range. Essentially you want to determine a peak and trough EBITDA multiple. I'd recommend just pulling this from CapIQ, and make sure to go back to 2008 if the comp set allows (this will likely be your floor).

From here, you'll want to apply the peak and trough multiples to the business that is featured in the case study, which will give you a peak and trough valuation. You then want to apply the median EBITDA multiple from the comps set to the business to get the current valuation. Compare this current valuation to the peak valuation. If the current value is close the to peak value, this means you'll want to be careful with how much you leverage the company, as the equity cushion is overstated. For example, if the multiple on the business is 9x and its peak multiple is 10x and trough multiple is 4x, the leverage multiple through your investment shouldn't be more than 3x probably. This is because even though 3x leverage implies 6x equity cushion currently and 7x based on the peak multiple, it only provides 1x equity cushion if the investment goes south. Depending on the case, you can play around with how much leverage you want to apply, but always run the math above in case you get grilled on this concept during the interview.

3. Collateral package

 An additional element that will come into play with a private credit case study will be a collateral recommendation. As previously mentioned, you'll likely be recommending a secured term loan type of instrument, so you'll need to mention the collateral that could be potentially used to back your investment. Note that if the company in the case study already has secured debt (revolver, term loan, etc), then you'll need to request these credit agreements in DD to analyze what they have collateral on, as then you'd likely have a second lien on those assets. 

Additional Note

It dawned on me that the most efficient way to quickly find debt comps for private credit case studies would be to reference the investment portfolios of publicly traded BDCs. I've put together a list of select publicly traded BDCs for people to pull comps from and have also placed an example of the information contains in Ares' most recent 10-Q.

Select List of Publicly Traded BDCs 

• Ares Capital Corporation (NASDAQ: ARCC)
• Golub Capital BDC, Inc. (NASDAQ: GBDC)
• Hercules Capital, Inc. (NYSE: HTGC)
• Monroe Capital Corporation (NASDAQ: MRCC)

Ares Capital Corporation Example (as of March 31, 2023)