Brightwater Retail Holdings · BWR
DEMO DATAUNDERWRITING ASSUMPTIONHOLDBrightwater Retail Holdings — First-Lien Term Loan
Proposed investment
Returns
| Base IRR (p=55%) | 13.1% | PASS |
| Downside IRR (p=30%) | 0.7% | PASS |
| Severe downside IRR (p=15%) | -13.9% | |
| Probability-weighted IRR (of expected cash flows) | 6.4% | FAIL |
| MOIC base / downside / severe | 1.39x / 1.02x / 0.71x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 7.7x | max 6.0x |
| Interest coverage (EBITDA / interest) | 1.31x | |
| Liquidity | $165M | |
| Covenant headroom (base, minimum) | 8% | min 15% |
| Credit score | 31 / 100 | High |
| Next maturity | 2027 | |
Downside
| Recovery (downside / severe) | 55% / 28% |
| Loss given default (severe) | 72% |
| Default period (downside / severe) | FY2027E / FY2027E |
| Probability of default (weighted) | 100% |
| Expected loss | 31.7% |
| Recovery needed for MOIC 1.0x | 55% of face |
Key risks (largest first)
- Thin interest coverage: EBITDA / interest 1.31x at FY2025A (EBITDA could fall 24% before coverage hits 1.0x).
- Refinancing: $480M maturity in FY2027E; only $151M projected liquidity; $329M refinancing requirement.
- Severe-case valuation recovery of 28% is below the 78.0 purchase price: a 72% loss given default.
- Downside-case recovery of 55% falls short of the purchase price.
- High leverage: net debt / EBITDA 7.7x (maximum in policy 6.0x).
Key protections (strongest first)
- Secured, rank 2: $180M ranks ahead.
- Base-case refinancing tests pass for all 4 maturing tranche(s); 0 are repaid from cash.
- Par-ish recovery via asset coverage
- Control of restructuring as lead first-lien lender
Catalysts
- May 2027 unsecured maturity
- Strategic alternatives process
- Borrowing-base redetermination
Diligence — 4 unresolved high-priority item(s)
Tracker →- Debt documentation review — In ProgressPriming / drop-down protections and baskets?
- Covenant package and definitions — In ProgressCovenant EBITDA definition and headroom?
- Maturity profile and refinancing plan — In ProgressIs the refinancing plan credible at current leverage?
- Asset valuation / appraisal support — Not StartedIndependent value vs assumed asset base?
Investment thesis
Unsecured notes mature in May 2027 and cannot be refinanced at current leverage, forcing a liability-management exercise or restructuring. The first-lien term loan at 78 is covered by ~$1.0B of inventory and owned real estate, so we get paid to wait and control the outcome.
The question: Does a 25.7% yield on a rank-2 secured claim compensate for 100% probability-weighted default risk and 72% severe-case loss?
Recommendation rationale — evidence from the model
HOLDHOLD (do not size yet): Expected-cash-flow IRR (probability-weighted) clears hurdle (6.4% vs ≥ 12.0%); Downside recovery meets minimum (valuation waterfall) (54.8% vs ≥ 60.0%); Net leverage within maximum (7.7x vs ≤ 6.0x).
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✓ | Base-case IRR clears hurdle | 13.1% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | 6.4% | ≥ 12.0% | core |
| ✓ | Downside IRR stays above floor | 0.7% | ≥ 0.0% | core |
| ✗ | Downside recovery meets minimum (valuation waterfall) | 54.8% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✓ | Entry yield meets minimum | 25.7% | ≥ 9.0% | secondary |
| ✗ | Net leverage within maximum | 7.7x | ≤ 6.0x | secondary |
| ✗ | Covenant headroom (base case, minimum) | 7.5% | ≥ 15.0% | secondary |
| ✗ | Principal protected in severe case (recovery ≥ price) | 28 vs 78.0 | recovery ≥ price | secondary |
| ✗ | No unresolved high-priority diligence | 4 open | 0 open | secondary |
Rule: PROCEED if all five core tests pass and ≤ 2 secondary tests fail; PASS if the base case and the downside both fail, or ≥ 3 core tests fail; otherwise HOLD. Thresholds (hurdle 12%, min downside IRR 0%, min yield 9.0%, max leverage 6.0x, min recovery 60%, min covenant headroom 15%) are configurable per case. The Excel Investment Summary tab implements the same rule by formula.
What would change my mind?
- EBITDA declines more than 24% from FY2025A (coverage < 1.0x) — or more than 9% (first covenant breaks).
- The entry price is above 80.0: the base case no longer earns the 12% hurdle (assumed price 78.0).
- Collateral / enterprise value falls more than 0% from the base-case valuation: the tranche starts to take losses.
- Market access weakens: base-case pro-forma coverage at refinancing is 1.22x vs the 1.20x test, at an assumed 11.0% refinancing rate — a higher spread or lower EBITDA flips the test.