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Kestrel Auto Components · KACO

DEMO DATAUNDERWRITING ASSUMPTIONPASS
Five-minute case summary

Kestrel Auto Components

DEMO DATAUNDERWRITING ASSUMPTION
PASS
1
The opportunity
Demo purchase of $100M face of First-Lien Term Loan at 84.0 (cash investment $84.4M): current yield 11.2%, yield to maturity 19.1%.
2
The question
Does a 19.1% yield on a rank-1 secured claim compensate for 100% probability-weighted default risk and 62% severe-case loss?
3
The thesis
First-lien pari with the revolver at 84 with ~$900M of PP&E, receivables and inventory behind it. Margins compressing and a 2027 unsecured maturity create a probable restructuring in which the first lien is covered in base/downside and impaired in severe.
4
The risk (what causes loss)
  • Thin interest coverage: EBITDA / interest 1.68x at FY2025A (EBITDA could fall 40% before coverage hits 1.0x).
  • Refinancing: $490M maturity in FY2027E; only $197M projected liquidity; $293M refinancing requirement.
  • Severe-case valuation recovery of 38% is below the 84.0 purchase price: a 62% loss given default.
  • Downside-case recovery of 52% falls short of the purchase price.
5
The protection
  • First-priority secured position on substantially all assets; 0% of recovery value is senior to us and 82% through our tranche.
  • Liquidity of $220M (20% of total debt).
  • Base-case refinancing tests pass for all 3 maturing tranche(s); 0 are repaid from cash.
  • Yield ~13% on a first-lien loan
6
The base case
Base case (55%): revenue 1.0% in FY2026E, EBITDA margin 9.0%; payment default in FY2027E; IRR 14.0%, MOIC 1.43x vs 12% hurdle.
7
The downside
Downside (30%): EBITDA $67M at the trough, peak net leverage 17.8x, covenants breach in FY2026E; default in FY2027E; IRR -4.6%. Severe (15%): default in FY2027E, IRR -10.8%.
8
The recovery
If the company defaults, recovery value is $293M (liquidation) in the severe case → 38% recovery (62% LGD) on the target tranche; downside 52%.
9
The decision
PASS. PASS: Expected-cash-flow IRR (probability-weighted) clears hurdle; Downside IRR stays above floor; Downside recovery meets minimum (valuation waterfall). The return does not compensate for the modelled downside.

Generated from the structured model (no free-text generation beyond the analyst’s thesis and risk lists). Hypothetical terms are underwriting assumptions; nothing here is a real transaction.