Kestrel Auto Components (KACO) — First-Lien Term Loan
Executive Summary
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%. Recommendation: PASS. Credit score 38/100 (High risk). Base-case IRR 14.0%, downside -4.6%, severe -10.8%; probability-weighted IRR 5.9% vs a 12% hurdle; weighted P(default) 100%; severe-case valuation recovery 38%. 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.
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?
Company Overview
Powertrain and chassis components supplier with EV-transition programs delayed and OEM volume under pressure. HQ Troy, MI; Autos / Tier-1 Auto Supplier. FY2025A revenue $1.8B, EBITDA $162M (9.0% margin); total debt $1.1B, cash $60M. DEMO DATA
Industry / Market
Auto suppliers are tied to production cycles, have thin margins, and face EV program volatility; liquidity and OEM support dictate outcomes.
Historical Financial Performance
| $M | FY2022A | FY2023A | FY2024A | FY2025A |
|---|---|---|---|---|
| Revenue | $1.9B | $2.0B | $1.9B | $1.8B |
| % growth | 2.1% | -5.5% | -4.3% | |
| Direct costs / COGS | $1.6B | $1.6B | $1.6B | $1.5B |
| Gross profit (NOI for real estate) | $360.8M | $360.2M | $300.8M | $270.0M |
| % margin | 18.5% | 18.1% | 16.0% | 15.0% |
| Operating expenses (cash, adjusted) | $117.0M | $119.4M | $112.8M | $108.0M |
| EBITDA (company-adjusted basis) | $243.8M | $240.8M | $188.0M | $162.0M |
| % margin | 12.5% | 12.1% | 10.0% | 9.0% |
| D&A | $87.8M | $89.5M | $84.6M | $81.0M |
| Share-based compensation | $0.0M | $0.0M | $0.0M | $0.0M |
| EBIT | $156.0M | $151.2M | $103.4M | $81.0M |
| Interest expense | $82.0M | $86.9M | $91.7M | $96.5M |
| EBT | $74.0M | $64.4M | $11.7M | ($15.5M) |
| Taxes | $18.5M | $16.1M | $2.9M | $0.0M |
| Net income (model basis) | $55.5M | $48.3M | $8.8M | ($15.5M) |
| Capex | $87.8M | $89.5M | $84.6M | $81.0M |
| Working capital & other cash items | $2.7M | $5.6M | ($15.4M) | ($11.2M) |
| Free cash flow | $52.8M | $42.7M | $24.2M | ($4.3M) |
Capital Structure
| Tranche | Rank | Secured | Face value | Rate | Maturity | Mark / price |
|---|---|---|---|---|---|---|
| Revolver | 1 | Yes | $90.0M | S+365bp | 2027-06-30 | — |
| First-Lien Term Loan | 1 | Yes | $600.0M | S+515bp | 2028-05-31 | 84.0 |
| Senior Unsecured Notes 8.25% | 3 | No | $400.0M | 8.25% | 2027-09-15 | 61.0 |
Total debt $1.1B (6.7x EBITDA); net debt $1.0B; liquidity $220M; loan-to-value through the target tranche 82%.
Credit Analysis
Net leverage 6.4x, EBITDA / interest 1.68x, FCF / debt -0.4%, DSCR 0.8x, liquidity ratio 2.1x. Score components: Leverage 2/15, Coverage 3/15, Liquidity 10/10, Free cash flow 1/10, Maturity risk 0/10, Margin stability 9/10, Revenue stability 8/8, Asset coverage 2/12, Industry risk 4/10. Score change vs FY2024A (same capital structure): 44 → 38 (Net leverage increased from 5.5x to 6.4x (-2.6 pts, negative); Interest coverage fell from 2.1x to 1.7x (-1.4 pts, negative); FCF / debt fell from 2.2% to -0.4% (-1.9 pts, negative)).
Debt Maturity Profile
| Period | Debt due | % of debt | Projected liquidity (Base) | Refinancing requirement |
|---|---|---|---|---|
| FY2027E | $490M | 45% | $197M | $293M |
| FY2028E | $600M | 55% | $197M | $403M |
Risk flag: $490M maturity in FY2027E; only $197M projected liquidity; $293M refinancing requirement.
Risk flag: $600M maturity in FY2028E; only $197M projected liquidity; $403M refinancing requirement.
| Tranche | Matures | Balance at maturity | Cash on hand | Net lev. (test ≤) | Pro-forma coverage (test ≥) | Refi rate | Interest burden after | Result | Resolution |
|---|---|---|---|---|---|---|---|---|---|
| Revolver | FY2027E | $53.2M | $0M | 6.2x (8.5x) | 1.66x (1.20x) | 10.5% | $5.6M | REFINANCING PASS | Refinanced |
| Senior Unsecured Notes 8.25% | FY2027E | $400.0M | $0M | 6.2x (8.5x) | 1.66x (1.20x) | 10.5% | $42.0M | REFINANCING PASS | Refinanced |
| First-Lien Term Loan | FY2028E | $582.0M | ($14M) | 6.1x (8.5x) | 1.59x (1.20x) | 10.5% | $61.1M | REFINANCING PASS | Refinanced |
Base Case
Revenue CAGR 1.0%; FY2030E EBITDA $185M (9.8% margin); trough EBITDA $164M; peak net leverage 6.4x; minimum EBITDA / interest 1.61x; cumulative FCF ($72M). Payment default modelled in FY2027E; target-tranche recovery 100%. IRR 14.0%, MOIC 1.43x.
Downside Case
Revenue CAGR -2.2%; FY2030E EBITDA $102M (6.3% margin); trough EBITDA $67M; peak net leverage 17.8x; minimum EBITDA / interest 0.64x; cumulative FCF ($423M). Payment default modelled in FY2027E; target-tranche recovery 52%. IRR -4.6%, MOIC 0.89x.
Severe Downside
Revenue CAGR -8.9%; FY2030E EBITDA $25M (2.2% margin); trough EBITDA $11M; peak net leverage 139.2x; minimum EBITDA / interest 0.09x; cumulative FCF ($661M). Payment default modelled in FY2027E; target-tranche recovery 38%. IRR -10.8%, MOIC 0.75x.
Covenant Analysis
| FY2026E | FY2027E | FY2028E | FY2029E | FY2030E | |
|---|---|---|---|---|---|
| Current metric | 6.40x | 6.24x | 6.12x | 6.04x | 5.94x |
| Covenant | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x |
| Headroom | 0.10x (2%) | 0.26x (4%) | 0.38x (6%) | 0.46x (7%) | 0.56x (9%) |
| Status | PASS | PASS | PASS | PASS | PASS |
| FY2026E | FY2027E | FY2028E | FY2029E | FY2030E | |
|---|---|---|---|---|---|
| Current metric | 11.86x | 17.78x | 16.52x | 15.35x | 14.31x |
| Covenant | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x | ≤ 6.50x |
| Headroom | −5.36x (-82%) | −11.28x (-174%) | −10.02x (-154%) | −8.85x (-136%) | −7.81x (-120%) |
| Status | BREACH | BREACH | BREACH | BREACH | BREACH |
Recovery Analysis
If the company defaults, recovery value is $293M (liquidation) in the severe case → 38% recovery (62% LGD) on the target tranche; downside 52%. Recovery value = MAX(going concern $51M, liquidation $293M) + cash, less administrative costs; severe case struck at FY2027E.
| Claim (by seniority) | Rank | Claim | Recovery | Recovery % | Loss | Loss % |
|---|---|---|---|---|---|---|
| Recovery value | $292.5M | |||||
| Less: administrative / DIP costs | ($11.7M) | |||||
| Revolver | 1 | $133.5M | $50.7M | 38.0% | $82.8M | 62.0% |
| First-Lien Term Loan | 1 | $605.9M | $230.1M | 38.0% | $375.8M | 62.0% |
| Senior Unsecured Notes 8.25% | 3 | $408.2M | $0.0M | 0.0% | $408.2M | 100.0% |
| Total claims | $1.1B | $280.8M | $866.8M | |||
| Equity (residual) | $0.0M | Wiped out | ||||
Investment Returns
| Base Case | Downside | Severe Downside | |
|---|---|---|---|
| Face value / purchase price / cash investment | $100M / 84.0 / $84.4M UNDERWRITING ASSUMPTION | ||
| Cash interest + exit/recovery proceeds | $18.6M + $102.3M | $21.6M + $53.2M | $24.6M + $39.1M |
| Capital gain / (loss) vs purchase price | $18.3M | ($30.8M) | ($44.9M) |
| MOIC | 1.43x | 0.89x | 0.75x |
| IRR (hurdle 12%) | 14.0% | -4.6% | -10.8% |
Key Risks
- 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
- 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
Due Diligence Items
| Item | Status | Priority | Open question |
|---|---|---|---|
| Historical financials tied to filings | In Progress | High | Do model inputs reconcile to audited statements? |
| Revenue and customer concentration | Issue Identified | Medium | Top-10 customer share and contract terms? |
| Supplier concentration | Not Started | Low | Any single-source dependencies? |
| Competitive position and management | Not Started | Medium | Share trend and management track record? |
| Debt documentation review | Not Started | High | Priming / drop-down protections and baskets? |
| Covenant package and definitions | In Progress | High | Covenant EBITDA definition and headroom? |
| Maturity profile and refinancing plan | In Progress | High | Is the refinancing plan credible at current leverage? |
| Collateral and lien perfection | Not Started | Medium | What assets secure the instrument? |
| Litigation and contingent liabilities | Not Started | Medium | Any material claims ahead of creditors? |
| Guarantees and structural subordination | Not Started | Medium | Which entities guarantee; any non-guarantor leakage? |
| Industry conditions and pricing | In Progress | Medium | Where are we in the industry cycle? |
| Macro and rate sensitivity | In Progress | Low | How does the credit behave at +300 bps? |
Recommendation
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 |
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.
Sources (3)
| Source | Document | Data type | Period | Accession | Doc date | Retrieved | Class |
|---|---|---|---|---|---|---|---|
| CreditIQ demo dataset | Kestrel Auto Components — illustrative financial statements FY2022–FY2025 | Income statement / cash flow | FY2022–FY2025 | — | 2026-03-31 | 2026-03-31 | DEMO DATA |
| CreditIQ demo dataset | Kestrel Auto Components — illustrative capital structure & covenants | Debt schedule | As of 2026-03-31 | — | 2026-03-31 | 2026-03-31 | DEMO DATA |
| CreditIQ demo dataset | Illustrative indicative bid marks (% of par) | Market price | 2026-03-31 | — | 2026-03-31 | 2026-03-31 | DEMO DATA |
Generated entirely from the structured model (inputs → analysis → memo): every figure reconciles to the Excel workbook (see Settings → Reconciliation). Hypothetical terms are underwriting assumptions. Not investment advice.