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Tidewater Office Partners · TWOP

DEMO DATAUNDERWRITING ASSUMPTIONPASS
Investment committee summary · prepared from demo data

Tidewater Office Partners — Second-Priority Term Loan

DEMO DATAUNDERWRITING ASSUMPTION
Recommendation
PASS

Proposed investment

Instrument
Second-Priority Term Loan
Secured · rank 2
Face value
$100.0M
legal claim
Purchase price
72.0
underwriting assumption
Cash investment
$72.4M
incl. 0.5% fees
Current yield / YTM
11.9% / 26.8%
Hold · maturity
2y · 2028-06-30

Returns

Base IRR (p=55%)24.9%PASS
Downside IRR (p=30%)-10.5%FAIL
Severe downside IRR (p=15%)-84.0%
Probability-weighted IRR (of expected cash flows)5.8%FAIL
MOIC base / downside / severe1.53x / 0.82x / 0.16x
Required IRR (hurdle)12%

Credit

Net leverage (FY2025A)8.6xmax 6.0x
Interest coverage (EBITDA / interest)1.80x
Liquidity$70M
Covenant headroom (base, minimum)10%min 15%
Credit score32 / 100High
Next maturity2026

Downside

Recovery (downside / severe)48% / 0%
Loss given default (severe)100%
Default period (downside / severe)FY2026E / FY2026E
Probability of default (weighted)100%
Expected loss30.7%
Recovery needed for MOIC 1.0x62% of face

Key risks (largest first)

  1. Severe-case valuation recovery of 0% is below the 72.0 purchase price: a 100% loss given default.
  2. Thin interest coverage: EBITDA / interest 1.80x at FY2025A (EBITDA could fall 44% before coverage hits 1.0x).
  3. Refinancing: $1150M maturity in FY2027E; only $45M projected liquidity; $1105M refinancing requirement.
  4. Base-case refinancing fails for 3 maturing tranche(s).
  5. Downside-case recovery of 48% falls short of the purchase price.

Key protections (strongest first)

  1. Secured, rank 2: $1.1B ranks ahead.
  2. Discounted second-priority entry at 72
  3. Asset sales to cure maturities

Catalysts

  • Nov-2026 unsecured maturity
  • Mar-2027 CMBS maturity / extension negotiation
  • Disposition program

Diligence — 6 unresolved high-priority item(s)

Tracker →
  • Historical financials tied to filings — In Progress
    Do model inputs reconcile to audited statements?
  • Quality of earnings / EBITDA add-backs — In Progress
    How much of adjusted EBITDA is add-backs?
  • Debt documentation review — Not Started
    Priming / drop-down protections and baskets?
  • Covenant package and definitions — Not Started
    Covenant EBITDA definition and headroom?
  • Maturity profile and refinancing plan — In Progress
    Is the refinancing plan credible at current leverage?
  • Asset valuation / appraisal support — Not Started
    Independent value vs assumed asset base?

Investment thesis

Appraised value covers the mortgage and most of the second-priority loan today, but the November 2026 unsecured maturity and March 2027 CMBS maturity compress the timeline. Returns are asymmetric: strong in base/downside, near-total loss in severe where office values fall >35%.

The question: Does a 26.8% yield on a rank-2 secured claim compensate for 100% probability-weighted default risk and 100% 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.

TestActualRequiredWeight
✓Base-case IRR clears hurdle24.9%≥ 12.0%core
✗Expected-cash-flow IRR (probability-weighted) clears hurdle5.8%≥ 12.0%core
✗Downside IRR stays above floor-10.5%≥ 0.0%core
✗Downside recovery meets minimum (valuation waterfall)47.8%≥ 60.0%core
✗Base-case refinancing succeedsFAILUREPASScore
✓Entry yield meets minimum26.8%≥ 9.0%secondary
✗Net leverage within maximum8.6x≤ 6.0xsecondary
✗Covenant headroom (base case, minimum)10.0%≥ 15.0%secondary
✗Principal protected in severe case (recovery ≥ price)0 vs 72.0recovery ≥ pricesecondary
✗No unresolved high-priority diligence6 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 44% from FY2025A (coverage < 1.0x) — or more than 10% (first covenant breaks).
  • The entry price is above 88.7: the base case no longer earns the 12% hurdle (assumed price 72.0).
  • Severe-case recovery returns the purchase price only if the distressed valuation multiple is at least 10.6x EBITDA (the severe case assumes 6.5x); the question is how much cushion we want.
  • Collateral / enterprise value falls more than 5% from the base-case valuation: the tranche starts to take losses.
  • Market access weakens: base-case pro-forma coverage at refinancing is 1.63x vs the 1.20x test, at an assumed 8.0% refinancing rate — a higher spread or lower EBITDA flips the test.