A sponsor asks you to lend 5.5x adjusted EBITDA for its buyout of Nandanvan Healthcare Services. Decide how much you would lend, at what price and on what covenants, and defend the gap to the ask.

Offer about Rs 585 crore, 4.5x reported EBITDA, at around 11% with a leverage covenant that counts only delivered savings. The ask of Rs 825 crore is 6.3x the EBITDA that exists today. Size on Rs 130 crore: it gives interest cover after capex of 1.6x and free cash of about Rs 29 crore to delever. At Rs 825 crore, cover is 1.1x and one repricing by the 30% customer leaves the company unable to pay interest from cash. The adjustments are not fictional; they are risk, and risk is priced and covenanted, not lent against.

A landlord deciding how much rent a tenant can afford looks at the salary on the payslip, not the raise the tenant expects next year. A lender is paid a fixed coupon from the cash the business actually produces, so it sizes the loan on the EBITDA it can see and treats the rest as upside that belongs to the equity. Of the Rs 20 crore of adjustments, the Rs 8 crore of relocation costs can be credited if the invoices show they are done; the Rs 12 crore of procurement savings are a plan. At 5.5x those adjustments alone are worth Rs 110 crore of the ask; the other Rs 130 crore is the extra turn of leverage.

Work the cash. EBITDA Rs 130 crore less capex Rs 27 crore leaves Rs 103 crore before interest and tax. At Rs 585 crore and 11%, interest is Rs 64 crore, cover after capex is 1.60x, and after tax about Rs 29 crore is left each year to repay debt, about 5% of the loan, slow but real. At Rs 825 crore and 11.5%, interest is Rs 95 crore, cover is 1.09x and free cash is about Rs 6 crore: the loan only ever gets repaid by refinancing or by the savings arriving on time.

The 30% customer is the single thing that can break this credit. Do not model losing it outright, which no lender would survive at any leverage; model what actually happens at renewal: a 20% price cut on 30% of revenue, Rs 54 crore, at a 35% contribution margin takes EBITDA to about Rs 111 crore. At Rs 585 crore the company still covers interest 1.31x and keeps Rs 15 crore of free cash; at Rs 825 crore cover is 0.89x and free cash is Rs -11 crore, which means borrowing to pay interest. That is the test the leverage has to pass, and only one level passes it.

The terms follow from the analysis. Pricing around 11%, with a step-up if leverage stays above 4.0x after two years. A net leverage covenant starting at 5.25x on reported EBITDA with a covenant EBITDAThe definition of EBITDA written into the loan agreement, which fixes what add-backs count and how large they may be. that caps add-backs at, say, 10% of EBITDA and counts savings only once delivered; stepping down to 4.0x over three years. Interest cover of at least 1.75x. A 50% excess cash flow sweep. And reporting covenants that give the lender the top-ten customer list and contract expiry dates every quarter, because the renewal date of the 30% customer is the date this loan is really tested on.

The judgement: Rs 585 crore now, with a Rs 60 crore delayed-draw or incremental facility that becomes available if the procurement savings show up in audited numbers. That gives the sponsor a path to its number without asking the lender to fund a plan. If the sponsor needs Rs 825 crore on day one, the right answer is a smaller cheque from this lender and a junior tranche from someone paid to take equity-like risk.