Why Financeable Transactions Fail Credit Approval

Size Debt From Underwritten Repayment Capacity

The requested financing amount reflects capital need. Debt capacity reflects underwritten repayment capacity.

Corporate facilities are commonly constrained by leverage, free cash flow, fixed-charge coverage and liquidity. Project facilities rely on CFADS, DSCR, LLCR and downside operating assumptions. Asset-backed structures depend on collateral eligibility, advance rates, concentration limits and liquidation values.

A borrower seeking $30 million may support only $18 million of senior debt. The residual requirement may require sponsor equity, subordinated capital, seller financing or another layer of the capital structure.

Match Liability Structure to Asset Duration

Tenor and amortization should correspond to asset duration and cash conversion.

A 120-day commodity cycle typically requires a self-liquidating trade facility. Receivables can support receivables finance or a borrowing base. Construction expenditure requires construction-period capital. Stabilized infrastructure can support amortizing term debt.

Acquisition financing may require several layers including senior debt, subordinated debt, seller financing and sponsor equity.

Define the Primary Repayment Source

Repayment-source analysis sits at the center of credit underwriting.

Operating cash flow, assigned receivables, contracted offtake, inventory monetization and asset-disposal proceeds carry distinct credit characteristics. The facility structure should provide sufficient control over the relevant cash flows.

Cash dominion, collection accounts, waterfalls, reserve accounts, assignments, pledges and guarantees can strengthen repayment control and reduce cash leakage.

Stress Debt-Service Capacity Before Distribution

Base-case projections establish expected performance. Stress cases establish credit resilience.

Relevant sensitivities may include revenue compression, margin deterioration, delayed completion, higher interest expense, slower collections, cost overruns, FX volatility or commodity-price movements.

The resulting changes should flow directly into liquidity, leverage, covenant headroom and debt-service metrics.

A project may present acceptable base-case DSCR while breaching minimum coverage under reduced production or delayed completion. An operating company may appear conservatively levered before maintenance capex and working-capital absorption are incorporated.

Separate Mandate Mismatch From Structural Deficiency

Lender rejections have different informational value.

Jurisdiction restrictions, sector exclusions, ticket-size thresholds and portfolio concentration usually indicate mandate mismatch. These require lender remapping.

Repeated objections concerning leverage, collateral sufficiency, sponsor capitalization, tenor or repayment certainty indicate structural deficiency. These require transaction restructuring.

Confusing the two can produce unnecessary repricing or restructuring. It can also result in continued distribution of a structure that repeatedly fails the same credit test.

Compare the Full Economic and Structural Package

Coupon provides only one component of financing cost.

OID, arrangement fees, commitment fees, amortization, cash sweeps, reserves, prepayment economics and covenant restrictions affect effective cost and financial flexibility.

Conditions precedent affect execution certainty. A lower-priced facility with extensive closing conditions may create more execution risk than a higher-priced facility with clearer approval parameters.