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Kestrel Auto Components · KACO

DEMO DATAUNDERWRITING ASSUMPTIONPASS

Investment committee summary · prepared from demo data

Kestrel Auto Components — First-Lien Term Loan

DEMO DATAUNDERWRITING ASSUMPTION

Recommendation

PASS

Proposed investment

Instrument

First-Lien Term Loan

Secured · rank 1

Face value

$100.0M

legal claim

Purchase price

84.0

underwriting assumption

Cash investment

$84.4M

incl. 0.5% fees

Current yield / YTM

11.2% / 19.1%

Hold · maturity

2y · 2028-05-31

Returns

Base IRR (p=55%)	14.0%	PASS
Downside IRR (p=30%)	-4.6%	FAIL
Severe downside IRR (p=15%)	-10.8%
Probability-weighted IRR (of expected cash flows)	5.9%	FAIL
MOIC base / downside / severe	1.43x / 0.89x / 0.75x
Required IRR (hurdle)	12%

Credit

Net leverage (FY2025A)	6.4x	max 6.0x
Interest coverage (EBITDA / interest)	1.68x
Liquidity	$220M
Covenant headroom (base, minimum)	2%	min 15%
Credit score	38 / 100	High
Next maturity	2027

Downside

Recovery (downside / severe)	52% / 38%
Loss given default (severe)	62%
Default period (downside / severe)	FY2027E / FY2027E
Probability of default (weighted)	100%
Expected loss	23.7%
Recovery needed for MOIC 1.0x	63% of face

Key risks (largest first)

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.
High leverage: net debt / EBITDA 6.4x (maximum in policy 6.0x).

Key protections (strongest first)

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
Likely amend-and-extend with fee/spread step-up

Catalysts

Revolver maturity June 2027
Unsecured notes September 2027
Covenant reset

Diligence — 4 unresolved high-priority item(s)

Tracker →

Historical financials tied to filings — In Progress
Do model inputs reconcile to audited statements?
Debt documentation review — Not Started
Priming / drop-down protections and baskets?
Covenant package and definitions — In Progress
Covenant EBITDA definition and headroom?
Maturity profile and refinancing plan — In Progress
Is the refinancing plan credible at current leverage?

Investment 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.

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?

Recommendation rationale — evidence from the model

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.

	Test	Actual	Required	Weight
✓	Base-case IRR clears hurdle	14.0%	≥ 12.0%	core
✗	Expected-cash-flow IRR (probability-weighted) clears hurdle	5.9%	≥ 12.0%	core
✗	Downside IRR stays above floor	-4.6%	≥ 0.0%	core
✗	Downside recovery meets minimum (valuation waterfall)	51.9%	≥ 60.0%	core
✓	Base-case refinancing succeeds	PASS	PASS	core
✓	Entry yield meets minimum	19.1%	≥ 9.0%	secondary
✗	Net leverage within maximum	6.4x	≤ 6.0x	secondary
✗	Covenant headroom (base case, minimum)	1.5%	≥ 15.0%	secondary
✗	Principal protected in severe case (recovery ≥ price)	38 vs 84.0	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 40% from FY2025A (coverage < 1.0x) — or more than 2% (first covenant breaks).
The entry price is above 88.1: the base case no longer earns the 12% hurdle (assumed price 84.0).
Collateral / enterprise value falls more than 14% from the base-case valuation: the tranche starts to take losses.
Market access weakens: base-case pro-forma coverage at refinancing is 1.66x vs the 1.20x test, at an assumed 10.5% refinancing rate — a higher spread or lower EBITDA flips the test.