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Northgate Software · NGS
DEMO DATAUNDERWRITING ASSUMPTIONHOLDInvestment committee summary · prepared from demo data
Northgate Software — Senior Unsecured Notes
DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
HOLDProposed investment
Instrument
Senior Unsecured Notes
Unsecured · rank 3
Face value
$100.0M
legal claim
Purchase price
96.0
underwriting assumption
Cash investment
$96.5M
incl. 0.5% fees
Current yield / YTM
7.0% / 7.7%
Hold · maturity
3y · 2031-03-31
Returns
| Base IRR (p=55%) | 8.1% | FAIL |
| Downside IRR (p=30%) | 4.9% | PASS |
| Severe downside IRR (p=15%) | -2.4% | |
| Probability-weighted IRR (of expected cash flows) | 5.7% | FAIL |
| MOIC base / downside / severe | 1.25x / 1.14x / 0.94x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 1.8x | max 6.0x |
| Interest coverage (EBITDA / interest) | 5.62x | |
| Liquidity | $240M | |
| Covenant headroom (base, minimum) | n/a | min 15% |
| Credit score | 90 / 100 | Low |
| Next maturity | 2029 | |
Downside
| Recovery (downside / severe) | 100% / 100% |
| Loss given default (severe) | 0% |
| Default period (downside / severe) | none / none |
| Probability of default (weighted) | 0% |
| Expected loss | 0.0% |
| Recovery needed for MOIC 1.0x | 76% of face |
Key risks (largest first)
- Unsecured, rank 3: $450M of debt ranks ahead.
- Weakest credit-score factor: Asset coverage (4.9 of 12 points).
- Spread compression leaves little return cushion
- AI-driven pricing pressure on workflow tools
Key protections (strongest first)
- Severe-case valuation recovery of 100% covers the 96.0 purchase price (principal protected).
- Coverage of 5.62x EBITDA / interest; EBITDA can fall 82% before coverage reaches 1.0x.
- Moderate leverage: net debt / EBITDA 1.8x.
- Liquidity of $240M (40% of total debt).
- Base-case refinancing tests pass for all 2 maturing tranche(s); 2 are repaid from cash.
Catalysts
- Fiscal-year renewal cohort data
- Potential refinancing at tighter spreads
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
High-quality, low-leverage credit. Debt is well covered in every scenario, but pricing near par leaves little spread for the risk taken; we would own the notes only on a spread-widening event.
The question: Does a 7.7% yield on a rank-3 unsecured claim compensate for 0% probability-weighted default risk and 0% severe-case loss?
Recommendation rationale — evidence from the model
HOLDHOLD (do not size yet): Base-case IRR clears hurdle (8.1% vs ≥ 12.0%); Expected-cash-flow IRR (probability-weighted) clears hurdle (5.7% vs ≥ 12.0%); Entry yield meets minimum (7.7% vs ≥ 9.0%).
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✗ | Base-case IRR clears hurdle | 8.1% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | 5.7% | ≥ 12.0% | core |
| ✓ | Downside IRR stays above floor | 4.9% | ≥ 0.0% | core |
| ✓ | Downside recovery meets minimum (valuation waterfall) | 100.0% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✗ | Entry yield meets minimum | 7.7% | ≥ 9.0% | secondary |
| ✓ | Net leverage within maximum | 1.8x | ≤ 6.0x | secondary |
| ✓ | Covenant headroom (base case, minimum) | n/m | ≥ 15.0% | secondary |
| ✓ | Principal protected in severe case (recovery ≥ price) | 100 vs 96.0 | 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 82% from FY2025A (coverage < 1.0x) — or more than n/m (first covenant breaks).
- The entry price is above 87.0: the base case no longer earns the 12% hurdle (assumed price 96.0).
- Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 2.0x EBITDA (the severe case assumes 8.0x); the question is how much cushion we want.
- Collateral / enterprise value falls more than 69% from the base-case valuation: the tranche starts to take losses.
- Market access weakens: base-case pro-forma coverage at refinancing is 8.71x vs the 1.20x test, at an assumed 8.0% refinancing rate — a higher spread or lower EBITDA flips the test.