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Summit Chemical · SMCH
DEMO DATAUNDERWRITING ASSUMPTIONPASSInvestment committee summary · prepared from demo data
Summit Chemical — Senior Unsecured Notes 5.75%
DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
PASSProposed investment
Instrument
Senior Unsecured Notes 5.75%
Unsecured · rank 3
Face value
$100.0M
legal claim
Purchase price
92.0
underwriting assumption
Cash investment
$92.5M
incl. 0.5% fees
Current yield / YTM
6.3% / 9.5%
Hold · maturity
2y · 2028-10-15
Returns
| Base IRR (p=55%) | 10.1% | FAIL |
| Downside IRR (p=30%) | -2.5% | FAIL |
| Severe downside IRR (p=15%) | -37.8% | |
| Probability-weighted IRR (of expected cash flows) | -0.7% | FAIL |
| MOIC base / downside / severe | 1.21x / 0.91x / 0.30x | |
| Required IRR (hurdle) | 12% | |
Credit
| Net leverage (FY2025A) | 4.2x | max 6.0x |
| Interest coverage (EBITDA / interest) | 3.17x | |
| Liquidity | $420M | |
| Covenant headroom (base, minimum) | 30% | min 15% |
| Credit score | 62 / 100 | Moderate |
| Next maturity | 2027 | |
Downside
| Recovery (downside / severe) | 66% / 16% |
| Loss given default (severe) | 84% |
| Default period (downside / severe) | FY2028E / FY2027E |
| Probability of default (weighted) | 45% |
| Expected loss | 22.7% |
| Recovery needed for MOIC 1.0x | 75% of face |
Key risks (largest first)
- Severe-case valuation recovery of 16% is below the 92.0 purchase price: a 84% loss given default.
- Refinancing: $1650M maturity in FY2028E; only $698M projected liquidity; $952M refinancing requirement.
- Downside-case recovery of 66% falls short of the purchase price.
- Severe case produces a payment default in FY2027E.
- Unsecured, rank 3: $1.0B of debt ranks ahead.
Key protections (strongest first)
- Coverage of 3.17x EBITDA / interest; EBITDA can fall 68% before coverage reaches 1.0x.
- Liquidity of $420M (24% of total debt).
- Base-case refinancing tests pass for all 3 maturing tranche(s); 1 are repaid from cash.
- Pull-to-par on notes at 92
- Refinancing premium/fees
Catalysts
- Refinancing launch
- Chlor-alkali price trend
Diligence — 7 unresolved high-priority item(s)
Tracker →- Historical financials tied to filings — Not StartedDo 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 — Issue IdentifiedPriming / 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?
- Asset valuation / appraisal support — Not StartedIndependent value vs assumed asset base?
Investment thesis
Entire capital structure matures within 2.5 years. Base-case refinancing is feasible at ~8.5%, but downside coverage drops toward 2x. The unsecured notes at 92 pull to par if refinanced and are well asset-covered, but we need clarity on refinancing plans.
The question: Does a 9.5% yield on a rank-3 unsecured claim compensate for 45% probability-weighted default risk and 84% severe-case loss?
Recommendation rationale — evidence from the model
PASSPASS: Base-case IRR clears hurdle; Expected-cash-flow IRR (probability-weighted) clears hurdle; Downside IRR stays above floor. The return does not compensate for the modelled downside.
| Test | Actual | Required | Weight | |
|---|---|---|---|---|
| ✗ | Base-case IRR clears hurdle | 10.1% | ≥ 12.0% | core |
| ✗ | Expected-cash-flow IRR (probability-weighted) clears hurdle | -0.7% | ≥ 12.0% | core |
| ✗ | Downside IRR stays above floor | -2.5% | ≥ 0.0% | core |
| ✓ | Downside recovery meets minimum (valuation waterfall) | 66.3% | ≥ 60.0% | core |
| ✓ | Base-case refinancing succeeds | PASS | PASS | core |
| ✓ | Entry yield meets minimum | 9.5% | ≥ 9.0% | secondary |
| ✓ | Net leverage within maximum | 4.2x | ≤ 6.0x | secondary |
| ✓ | Covenant headroom (base case, minimum) | 30.0% | ≥ 15.0% | secondary |
| ✗ | Principal protected in severe case (recovery ≥ price) | 16 vs 92.0 | recovery ≥ price | secondary |
| ✗ | No unresolved high-priority diligence | 7 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 68% from FY2025A (coverage < 1.0x) — or more than 24% (first covenant breaks).
- The entry price is above 89.0: the base case no longer earns the 12% hurdle (assumed price 92.0).
- Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 17.9x EBITDA (the severe case assumes 5.0x); the question is how much cushion we want.
- Collateral / enterprise value falls more than 7% from the base-case valuation: the tranche starts to take losses.
- Market access weakens: base-case pro-forma coverage at refinancing is 3.71x vs the 1.20x test, at an assumed 8.5% refinancing rate — a higher spread or lower EBITDA flips the test.