Question for Lenders (loan sizing)

Hi Yoon, I have a traditional commercial banking background with experience in asset based lending, cash flow lending, and “work-out”. My gut says that this is beyond the traditional bank route but if by chance it isn’t, here is how most traditional banks think.

1) cash flow: fixed charge coverage ratio or debt service coverage (almost the same thing - EBITDA minus dividends/distributions minus CapEx (maintenance of unfinanced actual) over interest and principal; toggle rent in the numerator and denominator depending on the institution)... aim for over 1.20x ratio

2) leverage: for your company size it will be an EBITDA multiple with senior debt over EBITDA less than 3.5x and/or total debt over EBITDA less than 4-4.5x

3) liquidity: cash/revolver availability minus deferred revenue, etc over operating 1 month of operating expenses. Healthy companies are over 3 months of liquidity but varies widely by industry

You will need a first lien on all assets and recourse in this type of structure. Depending on the asset mix, would asset based lending work here? I have experience in that too. In asset based structures liquidity is most important with little regard to leverage ratios with a cash flow ratio over 1.00x

Happy to chat more if needed.

Hi Yoon - A couple of thoughts:

- $5M of EBITDA would put you in the range of some institutional private credit / alternative investment funds.

- Ultimately, the leverage and LTV a lender would provide will depend on the credit quality of the asset. Hard to assess with limited info, but 50% LTV (or 3x in this case) for a straight senior deal would be in the ball park.

- The "cash equity" coming in will be a consideration in this case. Sounds like there would a lot of "rolled equity" in this case, so lenders might discount the value of that, adding some pressure to the LTV / leverage figures I mentioned above.

- Most private credit lenders prefer cash-pay interest. There are lenders out there who will craft creative structures with PIK toggles, but usually this creeps into the "mezz" territory with a correspondingly higher cost of capital.

- As a searchfunder, you'll likely be classified as a "non-traditional sponsor" by most private credit firms (as opposed to a funded private equity firm) which will likely drive higher rates and less-favorable terms, unfortunately.

- Regarding structure, it would be uncommon to lend directly to the SearchFund itself or even the actual HoldCo. Usually, the Borrower entity would be a wholly-owned subsidiary of the HoldCo for structural seniority, but this depends on a variety of factors. Not sure if this is what you were asking about on this point.

Happy to elaborate on anything above if helpful.