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Redwood Broadband · RWBB

DEMO DATAUNDERWRITING ASSUMPTIONHOLD
Investment committee summary · prepared from demo data

Redwood Broadband — Second-Lien Notes 10.50%

DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
HOLD

Proposed investment

Instrument
Second-Lien Notes 10.50%
Secured · rank 2
Face value
$100.0M
legal claim
Purchase price
78.0
underwriting assumption
Cash investment
$78.4M
incl. 0.5% fees
Current yield / YTM
13.5% / 21.3%
Hold · maturity
3y · 2029-03-15

Returns

Base IRR (p=55%)18.3%PASS
Downside IRR (p=30%)11.0%PASS
Severe downside IRR (p=15%)-40.6%
Probability-weighted IRR (of expected cash flows)10.8%FAIL
MOIC base / downside / severe1.58x / 1.32x / 0.35x
Required IRR (hurdle)12%

Credit

Net leverage (FY2025A)6.7xmax 6.0x
Interest coverage (EBITDA / interest)1.75x
Liquidity$350M
Covenant headroom (base, minimum)-4%min 15%
Credit score36 / 100High
Next maturity2027

Downside

Recovery (downside / severe)80% / 6%
Loss given default (severe)94%
Default period (downside / severe)FY2027E / FY2027E
Probability of default (weighted)100%
Expected loss19.9%
Recovery needed for MOIC 1.0x57% of face

Key risks (largest first)

  1. Severe-case valuation recovery of 6% is below the 78.0 purchase price: a 94% loss given default.
  2. Thin interest coverage: EBITDA / interest 1.75x at FY2025A (EBITDA could fall 43% before coverage hits 1.0x).
  3. Refinancing: $1700M maturity in FY2028E; only $254M projected liquidity; $1446M refinancing requirement.
  4. High leverage: net debt / EBITDA 6.7x (maximum in policy 6.0x).
  5. Severe case produces a payment default in FY2027E.

Key protections (strongest first)

  1. Secured, rank 2: $1.9B ranks ahead.
  2. Base-case refinancing tests pass for all 4 maturing tranche(s); 0 are repaid from cash.
  3. Equitization optionality at the fulcrum
  4. 13%+ current yield

Catalysts

  • Revolver Dec-2027 maturity
  • Fiber asset sale process
  • Capex cut announcement

Diligence — 5 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?
  • Asset valuation / appraisal support — In Progress
    Independent value vs assumed asset base?

Investment thesis

Network assets (~$5.2B replacement-cost-based) provide asset coverage of 1.2x of total debt, but cash flow after capex is negative. The 10.5% second-lien at 78 is the fulcrum candidate in a restructuring where unsecured holders are the first to take losses.

The question: Does a 21.3% yield on a rank-2 secured claim compensate for 100% probability-weighted default risk and 94% severe-case loss?

Recommendation rationale — evidence from the model

HOLD

HOLD (do not size yet): Expected-cash-flow IRR (probability-weighted) clears hurdle (10.8% vs ≥ 12.0%); Net leverage within maximum (6.7x vs ≤ 6.0x); Covenant headroom (base case, minimum) (-3.9% vs ≥ 15.0%).

TestActualRequiredWeight
✓Base-case IRR clears hurdle18.3%≥ 12.0%core
✗Expected-cash-flow IRR (probability-weighted) clears hurdle10.8%≥ 12.0%core
✓Downside IRR stays above floor11.0%≥ 0.0%core
✓Downside recovery meets minimum (valuation waterfall)80.5%≥ 60.0%core
✓Base-case refinancing succeedsPASSPASScore
✓Entry yield meets minimum21.3%≥ 9.0%secondary
✗Net leverage within maximum6.7x≤ 6.0xsecondary
✗Covenant headroom (base case, minimum)-3.9%≥ 15.0%secondary
✗Principal protected in severe case (recovery ≥ price)6 vs 78.0recovery ≥ pricesecondary
✗No unresolved high-priority diligence5 open0 opensecondary

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 43% from FY2025A (coverage < 1.0x) — or more than 11% (first covenant breaks).
  • The entry price is above 90.3: the base case no longer earns the 12% hurdle (assumed price 78.0).
  • Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 7.5x EBITDA (the severe case assumes 5.5x); the question is how much cushion we want.
  • Collateral / enterprise value falls more than 10% from the base-case valuation: the tranche starts to take losses.
  • Market access weakens: base-case pro-forma coverage at refinancing is 1.74x vs the 1.20x test, at an assumed 9.5% refinancing rate — a higher spread or lower EBITDA flips the test.