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Cloudspire Technologies · CSPR
DEMO DATAUNDERWRITING ASSUMPTIONHOLDInvestment committee summary · prepared from demo data
Cloudspire Technologies — First-Lien Term Loan
DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
HOLDProposed investment
Instrument
First-Lien Term Loan
Secured · rank 1
Face value
$100.0M
legal claim
Purchase price
91.0
underwriting assumption
Cash investment
$91.5M
incl. 0.5% fees
Current yield / YTM
11.1% / 15.5%
Hold · maturity
3y · 2028-04-30
Returns
| Base IRR (p=55%) | 13.5% | PASS |
| Downside IRR (p=30%) | 9.9% | PASS |
| Severe downside IRR (p=15%) | -3.6% | |
| Probability-weighted IRR (of expected cash flows) | 10.3% | FAIL |
| MOIC base / downside / severe | 1.42x / 1.38x / 0.91x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 6.2x | max 6.0x |
| Interest coverage (EBITDA / interest) | 1.46x | |
| Liquidity | $115M | |
| Covenant headroom (base, minimum) | 33% | min 15% |
| Credit score | 38 / 100 | High |
| Next maturity | 2027 | |
Downside
| Recovery (downside / severe) | 90% / 56% |
| Loss given default (severe) | 44% |
| Default period (downside / severe) | FY2028E / FY2027E |
| Probability of default (weighted) | 45% |
| Expected loss | 9.7% |
| Recovery needed for MOIC 1.0x | 57% of face |
Key risks (largest first)
- Thin interest coverage: EBITDA / interest 1.46x at FY2025A (EBITDA could fall 32% before coverage hits 1.0x).
- Refinancing: $650M maturity in FY2028E; only $175M projected liquidity; $475M refinancing requirement.
- Downside-case recovery of 90% falls short of the purchase price.
- High leverage: net debt / EBITDA 6.2x (maximum in policy 6.0x).
- Severe-case valuation recovery of 56% is below the 91.0 purchase price: a 44% loss given default.
Key protections (strongest first)
- First-priority secured position on substantially all assets; 0% of recovery value is senior to us and 97% through our tranche.
- Base-case refinancing tests pass for all 2 maturing tranche(s); 1 are repaid from cash.
- No covenant breach in the Downside case.
- Margin expansion compounding with growth
- ~11.5% yield at 91
Catalysts
- Annual-plan renewals
- Sponsor equity injection
- Add-on acquisition
Diligence — 6 unresolved high-priority item(s)
Tracker →- Historical financials tied to filings — In ProgressDo model inputs reconcile to audited statements?
- Quality of earnings / EBITDA add-backs — In ProgressHow much of adjusted EBITDA is add-backs?
- Free cash flow conversion — In ProgressWhat is cash conversion after capex and working capital?
- Debt documentation review — Not StartedPriming / drop-down protections and baskets?
- Covenant package and definitions — Not StartedCovenant EBITDA definition and headroom?
- Maturity profile and refinancing plan — Not StartedIs the refinancing plan credible at current leverage?
Investment thesis
Strong growth and improving margins, but coverage is only ~1.5x and the loan is a single-tranche capital structure with recovery that depends on software going-concern value. Needs diligence on ARR quality and sponsor support before sizing.
The question: Does a 15.5% yield on a rank-1 secured claim compensate for 45% probability-weighted default risk and 44% severe-case loss?
Recommendation rationale — evidence from the model
HOLDHOLD (do not size yet): Expected-cash-flow IRR (probability-weighted) clears hurdle (10.3% vs ≥ 12.0%); Net leverage within maximum (6.2x vs ≤ 6.0x); Principal protected in severe case (recovery ≥ price) (56 vs 91.0 vs recovery ≥ price).
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✓ | Base-case IRR clears hurdle | 13.5% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | 10.3% | ≥ 12.0% | core |
| ✓ | Downside IRR stays above floor | 9.9% | ≥ 0.0% | core |
| ✓ | Downside recovery meets minimum (valuation waterfall) | 89.8% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✓ | Entry yield meets minimum | 15.5% | ≥ 9.0% | secondary |
| ✗ | Net leverage within maximum | 6.2x | ≤ 6.0x | secondary |
| ✓ | Covenant headroom (base case, minimum) | 33.5% | ≥ 15.0% | secondary |
| ✗ | Principal protected in severe case (recovery ≥ price) | 56 vs 91.0 | recovery ≥ price | secondary |
| ✗ | No unresolved high-priority diligence | 6 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 32% from FY2025A (coverage < 1.0x) — or more than 23% (first covenant breaks).
- The entry price is above 94.4: the base case no longer earns the 12% hurdle (assumed price 91.0).
- Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 11.4x EBITDA (the severe case assumes 7.0x); the question is how much cushion we want.
- 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 1.99x vs the 1.20x test, at an assumed 9.5% refinancing rate — a higher spread or lower EBITDA flips the test.