Case 094Credit analysis and ratingsCore

Evaluate a five-year secured bond from a logistics company at 10.25% and identify all the relevant risks: EBITDA Rs 180 crore, debt Rs 720 crore, one customer at 38% of revenue and a heavy warehouse lease book.

NuveenChicago · 2025

The situation

Tavish Logistics runs trucking and warehousing for consumer goods companies. Revenue is Rs 1,200 crore and EBITDA Rs 180 crore. It has Rs 720 crore of secured debt, including a new Rs 300 crore five-year bond offered at 10.25%, all sharing one pool of security: trucks and receivables with a book value of Rs 450 crore. Average interest on the debt is about 10%.

Its warehouses are leased. Lease liabilities on the balance sheet are Rs 360 crore and lease payments Rs 80 crore a year; the reported EBITDA is before those payments. One customer provides 38% of revenue under a contract that renews in three years, and the contribution margin on that business is about 25%. The bond's leverage covenant is 4.5x debt to EBITDA, with debt defined to exclude leases. The interviewer notes that A-rated logistics bonds yield about 9.40% and BBB about 10.60%.

Your task

Evaluate the bond: identify every relevant risk, size each with a number, and decide whether 10.25% pays for them.

Quick check

Which number best captures Tavish's real leverage?

Worked solution

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

30-second answerThe answer to give first

The bond does not pay enough: at 10.25% it is priced between A and BBB, but the credit looks like BBB or weaker. Lease-adjusted leverage is 6.0x, not 4.0x, and EBITDA covers interest plus rent only 1.18 times. One customer is 38% of revenue; losing it would cut EBITDA to about Rs 66 crore. Security covers only 0.62x of the secured debt, and the covenant ignores leases. I would pass, or ask for more yield and tighter terms.

Step 1How do you organise all the risks without making a list?

Use four boxes and put a number in each: business risk, financial risk, structural risk and documentation risk. Every risk you name should come with the figure that sizes it; a risk without a number is a worry, not an analysis. A doctor does not tell a patient they might be unwell; they say the blood pressure is 160 over 100. The interviewer's instruction to identify all the relevant risks is a test of whether you can cover the ground and still rank what matters.

Every risk named, with the number that sizes itBusiness38% of revenue from one customerLose it: EBITDA 180 to about 66Financial4.0x debt, 6.0x with leasesFixed charge cover 1.18xStructuralSecured on trucks and receivablesRs 450 crore of security: 0.62x coverDocumentationLeverage covenant ignores leasesCustomer contract renews in bond year 3A priced risk needs its number; a listed risk without one is a worry, not an analysis
Each of Tavish's risks comes with its size: a 38% customer whose loss would cut EBITDA to about Rs 66 crore, lease-adjusted leverage of 6.0x and fixed charge cover of 1.18x, security covering 0.62x of the secured debt, and a covenant that ignores the leases.
Step 2Which risks matter most here?

Start with the leases, because they change every ratio. Reported EBITDA is before Rs 80 crore of warehouse rent, so treat the Rs 360 crore of lease liabilities as debt: leverage is 6.0x, and EBITDA covers interest of Rs 72 crore plus rent of Rs 80 crore only 1.18 times. Then the customer. The contract brings in Rs 456 crore of revenue at a 25% contribution, about Rs 114 crore of EBITDA. If it is not renewed in year three, EBITDA falls to about Rs 66 crore, which does not cover fixed charges of Rs 152 crore.

Can EBITDA meet interest and rent? Today barely; without the big customer, nofixed charges 152: interest 72 + leases 80180EBITDA todaycover 1.18x66EBITDA without the customercover 0.43x
Tavish's EBITDA of Rs 180 crore covers interest plus lease payments of Rs 152 crore only 1.18 times today, and if its largest customer leaves, EBITDA of about Rs 66 crore covers them 0.43 times, less than half of what is due.
Step 3Does the security and the documentation help?

Less than the word secured suggests. The bond shares Rs 450 crore of trucks and receivables with Rs 420 crore of other secured debt, so the pool covers only 0.62x of the claims on it, and trucks lose value fast. The warehouses, which the business depends on, belong to landlords. The covenant allows 4.5x on a definition that leaves out leases, so Tavish could add debt up to 4.5x, taking lease-adjusted leverage to 6.5x, without breaching anything. The contract renewal falls in year three of a five-year bond, so the biggest single risk sits inside the bond's life.

Close with price and a view. At 10.25% the bond is priced between the 9.40% of A-rated names and the 10.60% of BBB, but on lease-adjusted leverage, concentration and thin security it reads as BBB or weaker, so it is not paying for its risks. I would pass at this price, or ask for a coupon above the BBB level, a covenant on lease-adjusted leverage, a minimum security cover with a top-up, and a step-up in coupon if the customer contract is not renewed. The limitation: the 25% contribution margin on the lost customer is an estimate, and Tavish may cut costs faster than that assumes.

Where candidates lose it

The most common miss is taking 4.0x at face value. The EBITDA is before warehouse rent, so the lease liabilities belong in the leverage figure; without them the bond looks a notch or two safer than it is.

The second is producing a long list of risks with no sizes and no ranking. The interviewer asked for all the relevant risks; the answer that lands names four, puts a number on each, and says which two decide the price.

What the interviewer asks next

  • What coupon would you ask for, and how would you justify it?
  • Write the covenant you would want on lease-adjusted leverage.
  • How would the credit change if Tavish bought its warehouses with new debt?
  • What would you ask the customer, if you could?

Asked at Nuveen, Credit, Chicago, 2025 (Wall Street Oasis): Evaluate this credit investment, identify all the relevant risks.

Company names and figures are illustrative.