A hotel chain's five-year senior secured bond yields 11.5%. It has EBITDA of Rs 90 crore, net debt of Rs 405 crore (4.5 times), interest cover of 2.1 times, and 60% of its debt matures in year three. Identify every relevant risk and decide whether to invest.

Invest, but only with a covenant that forces the year-three loan to be refinanced early, because refinancing is the risk that decides this credit. Cover of 2.1 times is adequate, but Rs 270 crore falls due two years before the bond. The security is real: debt is about 56% of the hotels' value, so even a stressed recovery is high, and the 4.5-point spread pays well for that risk.

Walk the credit the way a lender walks a house before a mortgage: the income that pays the loan, the structure of what is owed, the asset behind it, and the people in charge. For a hotel bond that gives business risk, financial and refinancing risk, collateral risk, governance risk and market risk, and each one gets a likelihood and an impact. Business: occupancy and room rates swing with the economy and travel. Financial: leverage, cover and the maturity wall. Collateral: what the hotels would fetch in a sale. Governance: promoter dealings. Market: rates at refinancing and the bond's liquidity.

Because a bond is repaid only if the company survives to its maturity. The bank loan of Rs 270 crore ranks alongside the bond and falls due in year three; if Mandakini cannot refinance it, the company defaults and the bond defaults with it, two years early. Free cash flow is about Rs 23 crore a year after interest, tax and maintenance capex, so by year three the company has paid down only about Rs 70 crore and must find the rest in the market. Whether lenders say yes depends on the hotel cycle in that year, which nobody can forecast today.

Stress the income. With 35% of costs variable, a 20% fall in revenue removes Rs 39 crore of EBITDA, taking it to Rs 51 crore, cover to 1.19 times and leverage to 7.9 times, a company that lenders would not refinance on normal terms. Now test the collateral. At 7 times the stressed EBITDA the hotels would fetch about Rs 357 crore against Rs 450 crore of secured debt, a recovery of about 79%. The spread of 4.5 points would cover a yearly default chance of up to about 22% at that loss, which is generous.

Yes, on conditions, and say them precisely. The yield pays for the credit risk because the security is strong; what the bond lacks is protection against the maturity wall. Ask for a covenant that the year-three loan be refinanced at least twelve months before it falls due, failing which surplus cash is swept into an escrow for the bond; a net leverage covenant of about 5 times; and confirmation from the trust deed that the bond's charge on the hotels really is shared equally with the loan. Without those, pass. Size the position to hold to maturity, since a small hotel bond may be hard to sell before then.