Deal and Credit Analysis

Three playbooks: M&A accretion/dilution, LBO returns, credit analysis and debt capacity. All three sit on the same debt machinery, given once below — each playbook then covers only what is distinctive to it. The method in SKILL.md (Phase 1 first, [ASSUMED] labels, checks as figures, scenarios as narratives, scope held) applies throughout and is not repeated here.

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Shared debt mechanics

Used by all three playbooks. Build it once and reference it; do not restate it in the output three times.

Tranche table. One row per instrument, in order of seniority:

Tranche	Amount	Rate (base + spread, or fixed)	Amortisation	Maturity	Key covenant
Revolver
Term Loan A / B
Senior Notes

State whether pricing is floating (name the base rate and the assumed forward path) or fixed. Note any PIK provision separately — PIK debt flatters cash interest coverage while compounding the balance, and the two effects must both appear.

Interest build. Compute by tranche, not on a blended rate. Show opening balance, draws, scheduled amortisation, sweep or optional repayment, closing balance, and interest for each year. Where interest is computed on an average balance the calculation is circular; either state that you are using the opening balance and say so, or iterate and say so.

Standard ratios. Define them once and hold the definition:

• Gross leverage = Total Debt / EBITDA
• Net leverage = (Total Debt − Cash) / EBITDA
• Interest coverage = EBITDA / Cash Interest (exclude PIK from the denominator, and say that you have)
• Fixed charge coverage = (EBITDA − Capex) / (Cash Interest + Required Amortisation)

Covenant headroom. For each maintenance covenant, report the tested level, the covenanted level, and the headroom in both percentage and absolute EBITDA terms for every year. The absolute figure — "EBITDA can fall $14m before breach" — is the one that gets read.

Downside protocol. Every playbook here stresses the case. Apply the shock, then answer three questions in order: does the company (a) breach a covenant, (b) fail to service cash interest and required amortisation, (c) need to draw the revolver. A structure that survives (a) but fails (b) is a different problem from one that fails (a) alone.

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M&A Accretion / Dilution

Whether the combination raises or lowers acquirer EPS, and what it takes to make it work. Accretion is a necessary test, not a sufficient one — say so in the output, and flag any deal that is accretive while destroying value.

When: "accretive", "dilutive", "EPS impact", "should we buy X", "does this deal work for shareholders", "how much can we pay".

Phases:

1. Deal mechanics. Total consideration (equity value plus assumed debt equals enterprise value); premium to the unaffected price if the target is public; funding mix as % cash / stock / debt; for stock consideration the exchange ratio and pro forma ownership split; transaction costs across advisory, financing and integration; assumed close date and any stub period.
2. Pro forma income statement. Acquirer, target, adjustments, pro forma — as four columns down to EPS. Itemise each adjustment on its own line rather than collapsing them: purchase price allocation D&A step-up on written-up intangibles, forgone interest income on cash consideration, interest on new acquisition debt, cost synergies phased across years 1–3, revenue synergies, and one-time integration and severance costs.
3. Accretion / dilution. (Pro forma EPS − standalone EPS) / standalone EPS, run three ways: no synergies, cost synergies only, full synergies. Then the break-even synergy — the annual pre-tax synergy that makes the deal exactly EPS neutral. Show the arithmetic, because that number is what the negotiation actually turns on.
4. Credit and value check. Pro forma leverage, interest coverage, and years to de-lever to the acquirer's target ratio using the shared mechanics above. Then the value test: compare the price paid to the present value of the acquired cash flows plus synergies. A deal financed with cheap debt can raise EPS while returning less than its cost of capital. If that is the case here, say it plainly.
5. Recommendation. Proceed / proceed with conditions / do not proceed, supported by EPS impact, strategic rationale, the binding risk, and the synergy level required to justify the price offered.

Required tables: four-column pro forma income statement; accretion at the three synergy levels; two-way sensitivity of accretion across purchase price and synergy level.

Treat revenue synergies as speculative. Present them separately from cost synergies, apply a stated haircut, and show the deal's arithmetic without them. Cost synergies are a plan; revenue synergies are a hope.

Challenge test: the three assumptions that most move EPS accretion, each with the level at which the deal turns dilutive.

Inputs to gather: acquirer name, LTM EPS, diluted shares, share price, current debt/EBITDA. Target name, LTM EBITDA, LTM net income, enterprise value or asking price. Deal size and proposed funding mix. Estimated cost and revenue synergies with a confidence level for each. Strategic rationale. Known regulatory or integration risk.

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LBO Model

Sponsor returns on a leveraged acquisition. Every number traces to a stated assumption, and the output names where the equity return is most at risk.

When: "LBO", "sponsor returns", "IRR and MoM", "can we lever this", "what can a PE buyer pay", "IC submission".

Phases:

1. Deal architecture. Sources and uses as a paired table — revolver, term loan, notes, sponsor equity and management rollover against purchase price, fees and expenses, and cash to balance sheet. Sources must equal uses; show the residual. Then entry multiple (EV / LTM EBITDA) and the equity cheque as a percentage of EV.
2. Debt structure. Per the shared mechanics. Note leverage market conditions if known — the structure that clears today is not the structure that cleared two years ago.
3. Operating model, years 1–5. Revenue to EBITDA carrying an explicit margin thesis, then less cash interest, cash taxes and required amortisation to reach free cash flow available for the sweep. State the sweep waterfall and the percentage swept at each level, then show closing debt by tranche each year.
4. Exit analysis. Years 3, 4 and 5, each at two exit multiples — entry multiple held flat, and entry less one turn. Exit EBITDA, exit multiple, enterprise value, less remaining debt, plus cash, equals equity proceeds, then gross MoM and gross IRR. Report gross; if the user wants net, ask for the fee and carry structure rather than assuming 2-and-20.
5. Sensitivity and risk. Rank the return drivers by impact — entry multiple, exit multiple, leverage, EBITDA growth. Give the covenant breach point as an EBITDA level, not a percentage. Run the downside (revenue −10%, margin −200bps) through the shared protocol and state whether the equity still returns above 1.0x MoM.
6. IRR bridge. Attribute the equity return across EBITDA growth, multiple expansion, and debt paydown, as three percentages summing to the total. A deal whose return comes mostly from assumed multiple expansion is a bet on the exit market, and the bridge is what makes that visible.
7. Recommendation. Invest or pass, supported by base case IRR, downside protection, the binding risk, and management alignment.

Required tables: sources and uses; debt schedule by tranche by year; exit analysis across the three exit years; IRR bridge.

Challenge test: the EBITDA level at which the covenant breaks, and the exit multiple at which the equity returns 1.0x.

Inputs to gather: company name and business description; LTM revenue; LTM EBITDA and margin; asking price or entry multiple; industry, to benchmark leverage capacity; the EBITDA growth thesis and whether it is organic, margin expansion or bolt-on; management team quality; known leverage market conditions or comparable sponsor transactions.

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Credit Analysis and Debt Capacity

How much debt the business can service in a downside, not in the base case. Default to conservatism — the asymmetry runs against the lender, and a capacity number that only works if nothing goes wrong is not a capacity number.

When: "how much debt can it carry", "debt capacity", "credit analysis", "leverage capacity", "can we refinance", "recap", "will this pass credit committee".

Phases:

1. EBITDA quality — before sizing anything. Test whether reported EBITDA is the right denominator. Is revenue recurring, one-time, or project-based? Are margins stable or cyclical? Is maintenance capex genuinely separated from growth capex, or is growth capex being classified away? Does cash conversion match EBITDA, or is working capital absorbing the difference? Then list every addback individually and mark each one accepted, haircut or rejected with a reason. Report your adjusted EBITDA, the company-reported figure, and the gap between them. Every downstream number in the analysis uses your figure.
2. Leverage benchmarks. A table of industry comparables showing gross leverage, net leverage, interest coverage and rating where known, then a stated view of the maximum leverage this sector supports in a normal credit market. Where the comparable set is thin, say how thin.
3. Capacity grid. Columns at 3.0x, 4.0x, 5.0x and 6.0x adjusted EBITDA. For each: total debt, annual interest at the assumed rate, interest coverage, free cash flow after interest and required amortisation, years to de-lever to 4.0x, and covenant headroom. This grid is the analysis; the recommendation is a selection from it.
4. Structure recommendation. The tranche table from the shared mechanics, sized at the recommended level, with each tranche's purpose stated.
5. Downside stress. Apply EBITDA −20% — a recession or an operational miss — through the shared protocol. Then report the minimum EBITDA needed to stay covenant-compliant and express the gap to base case as a percentage cushion.
6. Recommendation. The recommended quantum in dollars and turns, why it is conservative enough to survive the downside while sufficient for the transaction purpose, and the single largest risk to the credit case.

Required tables: addback scrutiny; industry leverage benchmarks; the capacity grid; recommended structure by tranche; downside stress results.

Challenge test: the EBITDA level at which the recommended structure breaches, and how far that sits below the trough of the last cycle for this business or sector. If cycle history is unavailable, say so rather than estimating it.

Inputs to gather: company name and business description; company-reported LTM EBITDA and the addback schedule behind it; three-year EBITDA margin trend; existing debt balance and terms; the purpose of the new debt — acquisition, recap, refinancing or growth; industry; ownership, whether sponsor-backed, public or family; known cyclicality or customer concentration.