Case 029Credit analysis and ratingsCore

Olvara Textiles asks for a Rs 150 crore five-year term loan on EBITDA of Rs 110 crore and existing debt of Rs 260 crore. Is it creditworthy for this loan?

ScotiabankToronto · 2026

The situation

Olvara Textiles spins and weaves cotton, with sales of Rs 800 crore, 60% of them exports priced in dollars. EBITDA is Rs 110 crore, depreciation Rs 30 crore and maintenance capex Rs 25 crore a year. Existing debt is Rs 260 crore at 9%, repaying Rs 10 crore a year. Tax is 25%.

It asks for a Rs 150 crore term loan at 10%, repaid in equal instalments over five years, to fund a new processing unit. The bank's policy: debt no more than 3.5x EBITDA, and a debt service cover ratio of at least 1.25x, measured as EBITDA less tax less maintenance capex, over interest plus principal due in the year. The bank gives no credit for the new unit's earnings until it runs.

Your task

Test the loan on leverage and debt service cover, give a yes or no for Rs 150 crore on these terms, and say what you could lend instead.

Quick check

Olvara passes both tests comfortably today. After the new loan, what happens?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Not for Rs 150 crore over five years: after the loan Olvara fails both tests, at 3.73x leverage and 0.95x debt service cover. Today it looks strong at 2.36x and 2.12x, but the new principal instalments swamp the cash. It is creditworthy for about Rs 83 crore on five years, or about Rs 104 crore on seven, with the rest funded by the promoter.

Step 1Why test the company after the loan rather than as it stands?

A household with no loans and a good salary looks safe to any lender. Add a car loan, a home loan and the new EMI together, and the same salary may not stretch. Creditworthiness for a loan is always judged on the pro formaRestated as if the proposed transaction had already happened, here with the new debt and its interest and repayments included. structure, with the new debt and its repayments already in place. Olvara's current ratios answer a question nobody asked.

Step 2What do the two tests show?

Leverage is quick: Rs 260 crore plus Rs 150 crore is Rs 410 crore on EBITDA of Rs 110 crore, 3.73x against a 3.5x ceiling. Debt service cover takes four lines. Interest rises to Rs 38.4 crore, which trims tax to Rs 10.4 crore, so cash available after tax and maintenance capex is Rs 74.6 crore. Debt service is Rs 38.4 crore of interest plus Rs 10 crore and Rs 30 crore of principal, Rs 78.4 crore, so cover is 0.95x: Olvara would be borrowing to repay.

Today's numbers pass; the numbers after the loan are the ones that countDebt / EBITDA (ceiling 3.5x)2.36xToday3.73xAfter loanpolicy ceiling 3.5xDebt service cover (floor 1.25x)2.12xToday0.95xAfter loanpolicy floor 1.25x
Olvara passes both policy lines today, at 2.36x leverage and 2.12x debt service cover, but after the Rs 150 crore loan it fails both, at 3.73x against a 3.5x ceiling and 0.95x against a 1.25x floor.
Step 3What could the bank lend instead?

Solve each test for the loan it allows. The leverage ceiling allows Rs 125 crore. Cover binds harder: 1.25x allows about Rs 83 crore on a five-year tenor, rising to about Rs 104 crore on seven years because each year's principal is smaller. So the answer is yes to Olvara, no to this loan: offer roughly Rs 104 crore over seven years, ask the promoter to fund the balance, and revisit once the new unit shows a year of earnings.

The loan each test would support, Rs croreRequested, 5 years150: fails both testsLeverage 3.5x allows125Cover 1.25x, 7-year tenor104Cover 1.25x, 5-year tenor83: binds on the asked tenor
Against the Rs 150 crore requested, the 3.5x leverage ceiling supports Rs 125 crore, while 1.25x debt service cover supports about Rs 104 crore on seven years and only about Rs 83 crore on the five years asked for.

Finish with the export risk, because a credit committee will ask. Sixty per cent of sales are in dollars while costs are mostly in rupees, so a 5% stronger rupee takes about Rs 24 crore off EBITDA and lifts pro forma leverage to 4.77x. Ask for Olvara's hedging policy and make a minimum hedge ratio a condition of the loan. Also check the working capital lines separately, since packing credit for exports sits outside this term loan but draws on the same cash.

Where candidates lose it

Most candidates quote today's leverage of 2.4x and today's cover of 2.1x and declare Olvara creditworthy. The question was whether it is creditworthy for this loan, which means the numbers after the loan.

The second miss is testing leverage alone. Leverage fails narrowly here; debt service cover fails badly, because five-year repayments on a new loan add Rs 30 crore a year of principal that EBITDA ratios never show.

What the interviewer asks next

  • Would a one-year moratorium on principal change your answer?
  • The promoter offers personal guarantees instead of more equity. How much comfort is that?
  • Which covenant would you use to control the currency risk?
  • How would you treat the new unit's earnings once it has run for a year?

Asked at Scotiabank, Credit Analytics Group (CAG), Toronto, 2026 (Wall Street Oasis): Technical questions about determining if a firm is credit worthy for x loan.

Company names and figures are illustrative.