You have read the CIM and databook for a stable, capex-light engineering services business with Rs 75 crore of EBITDA. The sponsor wants Rs 300 crore of debt. What leverage, pricing and covenants do you propose, and how do you handle the two biggest risks?

Lend about Rs 270 crore, 3.6x, at a margin over the benchmark with a 2% fee and call protection, and set a 4.75x leverage covenant. At that size interest cover is 2.5x, cash repays about 10% of the loan a year, and EBITDA can fall 24% before a breach. Losing the largest client leaves leverage at 4.5x, inside the covenant. The receivables risk is handled by diligence on ageing and monthly reporting.

Three numbers and a reason for each. Think of a relative who asks to borrow money for a shop: you decide how much, what you charge, and what promise you want in writing if things go wrong. A credit recommendation is a leverage number, a price and a protection, and every one of them comes from the cash flow, not from the purchase price. The sponsor paying 9x tells you how much equity sits beneath you, Rs 375 crore at the ask, which is useful comfort. It does not tell you whether the business can pay Rs 33 crore of interest every year and still bring the loan down.

Start from free cash flow at the sponsor's ask. EBITDA of Rs 75 crore, less Rs 5 crore of capex, less tax of about Rs 9 crore after the interest deduction, less Rs 4 crore of working capital, less Rs 33 crore of interest, leaves Rs 23.8 crore. At Rs 300 crore the loan earns 2.27x interest cover and repays 7.9% of itself a year; at Rs 270 crore those become 2.53x and 9.7%. Both are serviceable for a business this steady, so the size is not decided by the base case. It is decided by what happens when the largest client leaves, which is the test in the table below.

Price in three parts. The margin over the floating benchmark is the running reward; the upfront fee, here 2%, is paid on day one and lifts the lender's yield over the life of the loan; and call protectionA premium the borrower pays if it repays the loan early, so the lender is not refinanced away as soon as the company improves. of 102 then 101 stops the sponsor refinancing you away the moment the business improves. Quote the margin as a spread and say that the benchmark moves with markets; the assumed 11% all-in is for the arithmetic only. Set the leverage covenant so EBITDA can fall about a quarter before it trips: at 3.6x opening leverage, 4.75x gives 24% headroom. Add a minimum interest cover of 2.0x, a 50% sweep of excess cash and 1% yearly amortisation so the loan falls even if nothing else goes right.

First, concentration. One state water board brings in 20% of EBITDA and the top five bring in 55%. You underwrite it by sizing the loan so the business survives losing the largest client inside the covenant: Rs 270 crore does, Rs 300 crore does not. In diligence, read the contract terms, renewal history and payment record of each of the top five, and ask how much of the pipeline is with new clients.

Second, receivables. At 110 days, about Rs 150 crore is owed by clients at any time, much of it by government agencies that pay late in a tight year, and unbilled work that has been booked as revenue but not yet invoiced can flatter EBITDA. You mitigate it by testing cash conversion, not EBITDA: three years of operating cash flow against EBITDA, an ageing schedule by client, and how much revenue sits unbilled beyond 180 days. Then write it into the loan: monthly ageing reports, and an EBITDA definition that excludes unbilled revenue older than 180 days. The limit of this answer is that it treats the sponsor's equity as passive; a lender who knows the sponsor has supported past portfolio companies through a bad year may stretch to 3.75x, and should say so.