A private credit fund is asked for a Rs 480 crore unitranche at 12% with 5% annual amortisation to a cold chain business with EBITDA of Rs 120 crore growing 10%. Build three years of cash flow available for debt service, debt service cover and leverage, and decide.

As asked, the loan fails in year one: Rs 35 crore of cash against Rs 81.6 crore of debt service is cover of 0.43 times, and it is still only 1.11 times in year two. Even with the sponsor funding the growth capex, year one is 0.92 times. Lend about Rs 365 crore, roughly 3 times EBITDA, with growth capex paid by the sponsor, which gives cover of 1.21, 1.45 and 1.74 times.

A household lender does not ask what someone earns; it asks what is left after rent, school fees and the car, because that is what pays the instalment. Cash available for debt service is EBITDA less every cash call that comes first: maintenance capex, growth capex already committed, tax and working capital. In year one that is 120 - 20 - 40 - 15 - 10 = Rs 35 crore. Debt service is interest of 12% on Rs 480 crore, Rs 57.6 crore, plus 5% amortisation, Rs 24 crore: Rs 81.6 crore.

Leverage of 4.0 times falling below 3 times by year three looks comfortable, and that is what the owner's pitch will lead with. But lenders are repaid in cash each year, and in year one the growth capex takes Rs 40 crore before a rupee reaches them, so cover is 0.43 times: the company cannot pay without borrowing more or the sponsor putting in cash. Even if the sponsor funds the warehouse, cover is 0.92 times in year one and 1.11 in year two, under the 1.0 line and then just above it. Strong later years do not help a borrower who defaults in the first.

Solve for the debt that passes the test in the hardest year. With growth capex paid by the sponsor, year-one cash is Rs 75 crore; at a 1.2 times minimum and a debt service of 17% of the loan, 12% interest plus 5% amortisation, the most Hemkund can carry is 75 / (1.2 x 0.17), about Rs 368 crore. Offer about Rs 365 crore, roughly 3 times EBITDA: cover is then 1.21, 1.45 and 1.74 times. Add a condition that the Rs 40 crore of growth capex is funded by sponsor equity before drawdown, a cash sweep of part of the excess cash, and a minimum cover covenant tested every quarter. The dividend the owner wanted shrinks; that is the point.

Close with what could still go wrong. Cold chain demand depends on a few large food and pharmaceutical customers, so check how concentrated revenue is and how long contracts run. Power is a large cost for refrigeration, so ask how much of a tariff increase customers absorb. And confirm the tax figure: if it rises with profits, year-three cover is lower than shown.