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Use cases · Investment & Deal

Credit approval memo.
Every ratio on the definition that decides it.

The memo a credit committee decides on: the facility and how it is repaid, leverage and coverage on stated definitions, covenant headroom in a base and a stress case, and a risk rating, argued. Add the borrower’s financials and the covenant package.

  • Cash flowCan cash flow service the debt?
  • HeadroomWhere does headroom run out?
  • RecoveryWhat would we recover?
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Runs: “Write a credit approval memo for a term loan to a US mid-market machinery maker: leverage and coverage on the credit agreement’s definitions, covenant headroom in a downside case, and a risk rating.” · No account needed.

The short answer

What is a credit approval memo?

A credit approval memo is the document a lender’s credit committee decides a facility on: what is being lent and why, how it will be repaid, whether cash flow can service the debt, where the covenants sit against a base and a stress case, what would be recovered in default, and the risk rating. Caspr writes it from the borrower’s financials and the covenant package, computes each ratio on a stated definition, and argues the recommendation.

Last updated Edited and approved by Joy, Founder & CEO

The anatomy

What goes into a credit approval memo?

A credit approval memo puts the borrower’s numbers against the facility’s tests: how the debt is repaid, how much room the covenants leave in a bad year, and what the lender gets back if it goes wrong.

The financial summary
Three to five years of history and the projections, pro forma for the new facility.
Leverage and coverage
Debt to EBITDA, fixed-charge and interest coverage over time, each on the definition the credit agreement uses.
Covenant headroom
The distance to each covenant at every test date, in a base case and a downside case, with the covenant that breaks first named.
Capital structure
Sources and uses, and who ranks where: seniority, guarantors and subordination.
Collateral and recovery
The collateral or borrowing-base schedule, lien position, and what would be recovered in default.
Comparable credits
Where a lender buying or pricing the paper reads it against credits at the same rating and sector.
The risk rating and recommendation
The rating assigned and argued, its history, and the recommendation with its conditions.

A credit memo informs the committee’s decision. It is not an examiner’s rating, and not a substitute for independent credit review.

Every version

Which credit memos can Caspr write?

Most asked

Bank credit officers

A bank credit officer or committee decides whether to approve, decline or amend the facility, and on what structure.

A bank credit approval memo is the document a credit committee approves, declines or amends a loan on: repayment, leverage, covenant headroom under stress, recovery and the risk rating.

What it answers

  • What is the loan for, and how will it be repaid if the first source fails?
  • What is leverage today and after the deal, and can cash flow cover the debt?
  • Where do the covenants sit against a base case and a downside case?
  • What would the bank recover in default, and what policy exceptions need approval?
  • Does the loan fit the bank’s industry and single-name limits, and how strong is the guarantor on its own?

What it covers

  • Total and senior debt to EBITDA, pro forma
  • Fixed-charge and interest coverage
  • Free cash flow to debt
  • Loan to value
  • Liquidity and revolver availability
  • Sector leverage and coverage norms

Investment & Deal · Thesis · $80

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It may ask for: for example, the borrower’s financial statements and the covenant package, so headroom can be tested on the real terms.

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Direct lenders

A private credit fund’s investment committee votes on a loan the fund is setting the terms for.

A direct-lending IC memo is the case a private credit fund puts to its own investment committee for a loan it is structuring, such as a unitranche: why the terms it set are enough.

What it answers

  • Are the leverage, pricing, covenants and security we negotiated enough to protect the loan?
  • What does cash flow look like in a base case and a downside case, and how much covenant room is left in the downside?
  • What does each covenant actually test, and how does it tighten over the life of the loan?
  • How good is the sponsor, and what is its record?
  • What is our hold size, and where do we sit in the club?

What it covers

  • Total and senior secured leverage, before and after close
  • Interest coverage and fixed-charge coverage, base and stress
  • Free cash flow conversion and the deleveraging path
  • Covenant headroom, in turns or percent
  • The return: spread, discount and fees, as yield in the base and downside cases

Investment & Deal · Thesis · $80

Arrives as PDF · Excel

It may ask for: for example, the fund’s hold size and hurdle rate on this loan.

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Loan and bond buyers

A credit analyst or portfolio manager decides to buy, hold or pass on paper an arranging bank has already structured.

A leveraged loan or high-yield note tells a credit buyer whether a loan or bond someone else structured is priced fairly against comparable credits, and what it recovers.

What it answers

  • Is this loan or bond cheap or rich against credits at the same rating and sector?
  • What do the covenants, cov-lite or not, let the borrower do that the headline terms hide?
  • What would we recover in default, given where we sit in the lien order?
  • Does the downside case still hold if we buy?

What it covers

  • Total and senior secured leverage, before and after the deal
  • Interest coverage and fixed-charge coverage, base and stress
  • Covenant headroom
  • Collateral coverage and loan to value on secured tranches
  • Relative value: where it trades against comparable credits at the same rating

Investment & Deal · Thesis · $80

Arrives as PDF · Excel

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Insurance investment teams

An insurer’s general-account investment team decides whether to buy, at what NAIC designation, and how it fits the liabilities.

An insurance private-placement memo is an insurer’s case for buying a private bond: the credit, the capital charge its designation brings, and how it matches the liabilities.

What it answers

  • Can the borrower repay, and how much covenant room is there?
  • What NAIC designation would this credit carry, and what capital charge follows?
  • Does the bond’s duration match the liabilities it is meant to fund?
  • Does it fit our industry, single-name and asset-class limits?

What it covers

  • Total and senior debt to EBITDA
  • Fixed-charge and interest coverage
  • NAIC designation
  • Asset duration against liability duration
  • Collateral and loan to value where secured
  • The sector’s risk-based capital charge

Investment & Deal · Thesis · $80

Arrives as PDF

It may ask for: for example, which liability book the bond is meant to match.

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Venture debt lenders

A venture debt lender’s credit team decides whether to lend, how much, and with what warrant coverage.

A venture debt memo underwrites a loan to a pre-profit, venture-backed company against its runway and its next equity round, not against EBITDA.

What it answers

  • How many months of runway does the company have, with and without the loan?
  • How much cash does it burn for each dollar of new revenue?
  • Will the existing investors lead or join the next round?
  • What happens to the loan if the next round slips?
  • Do the warrants pay for the risk, and what do we recover if the company fails first?

What it covers

  • Months of runway, before and after the facility
  • Burn multiple
  • Revenue growth and gross margin trend
  • Warrant coverage
  • Capital raised to date and lead investors
  • The likelihood of follow-on funding, stated in words

Investment & Deal · Thesis · $80

Arrives as PDF

It may ask for: for example, the cap table and the terms of the latest equity round.

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Distressed investors

A distressed or special-situations investor decides whether to buy toward the fulcrum, and at what price.

A distressed recovery memo finds where a troubled company’s value breaks: which class of debt is the fulcrum, and what each class recovers across a range of values.

What it answers

  • Where does the value break, and which class is the fulcrum security?
  • What does each class recover at the low, middle and high end of the value range?
  • In Chapter 11, what does the plan convert each claim into?
  • Does an intercreditor agreement or a make-whole dispute change who actually gets paid?
  • What are the DIP financing terms, and does anything prime us?

What it covers

  • The enterprise value range and the method behind each end
  • Going-concern against liquidation value
  • The recovery waterfall, by class, across the range
  • Historical recovery by lien position and industry
  • Weeks of cash on the 13-week cash flow

Investment & Deal · Diligence · $300 Soon

Arrives as PDF · Excel

It may ask for: for example, whether the case is pre-petition or already in Chapter 11.

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CLO managers

A CLO manager or tranche investor decides whether to buy or hold a tranche.

A CLO tranche analysis asks whether the vehicle survives its own tests: overcollateralization and interest-coverage cushion under stress, and which tranche is cut off first.

What it answers

  • How much cushion do the OC and IC tests have, and at what stress do they break?
  • Where are the rating factor and diversity score against the deal’s own limits?
  • Is the deal still reinvesting, and what does that leave to the manager?
  • Where does our tranche sit if a test breaks: who is cut off first?

What it covers

  • Overcollateralization (OC) and interest-coverage (IC) test levels against triggers, now and projected
  • Weighted-average rating factor (WARF) and diversity score
  • Weighted-average spread and life
  • The tranche’s attachment and detachment points
  • Leverage and coverage across the underlying loans

Investment & Deal · Diligence · $300 Soon

Arrives as PDF · Excel

It may ask for: for example, which tranche: equity, mezzanine or senior.

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Not listed?

Describe your own version, and Caspr shows you the report it would build before anything runs.

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Where the analysis earns its keep

Where do credit memos go wrong?

Leverage, on whose definition
Gross or net debt, which EBITDA add-backs, cash interest and cash tax. The memo states the definition behind every ratio, so the committee reads the same number the credit agreement tests.
The covenant that binds first
Headroom is run on every covenant in both cases, and the memo says which one breaches first. It is not always leverage.
Which yardstick applies
Supervisory guidance differs by regulator, and rating-agency thresholds vary by sector. The memo states which it assumed.

The question this runs

“Write a credit approval memo for a term loan to a US mid-market machinery maker: leverage and coverage on the credit agreement’s definitions, covenant headroom in a downside case, and a risk rating.”

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Before anything runs, Caspr shows you the report it would build and asks what it needs.

Questions

Questions about credit memos

What it is

What is the difference between a credit memo and a credit approval memo?

The same words name two documents. In accounting, a credit memo is a note a seller issues to reduce what a buyer owes. In lending, a credit approval memo is the document a credit committee decides a loan on: repayment, leverage, covenant room, recovery and the risk rating. This page is about the second.

What is the difference between a credit memo and an IC memo?

A credit memo asks whether the borrower survives a bad year: cash flow against the covenants, base case against downside, and what is recovered. An IC memo asks whether an equity investment earns its return against the fund’s hurdle. Direct lenders call their credit memo an IC memo, because their own investment committee votes on it.

Is there a credit memo template?

Caspr does not offer a blank template, and every lender’s house format differs. What a credit memo has to contain is on this page: the financial summary, leverage and coverage, covenant headroom by test date, the capital structure, collateral and recovery, and the risk rating with its conditions. Caspr writes the memo itself, finished.

How to do it

How do I work out covenant headroom for a credit memo?

Set each covenant level against the borrower’s actual ratio at every test date, in turns or percent, first in a base case and then in a downside case. Then say which covenant breaks first, because it is not always leverage. A headroom table without that sentence is unfinished.

How is a venture debt memo different from a bank credit memo?

A venture debt memo has no EBITDA to lend against. It underwrites runway, the burn multiple and the likelihood of the next equity round, and it asks what happens to the loan if that round slips. A bank credit memo tests cash flow against covenants in a base case and a downside case.

Which regulatory guidance does it assume?

The one you name. Supervisory guidance differs between the OCC, the Fed and the FDIC, so the memo states which yardstick it applied. Where you name none, it states the assumption it made, so the committee reads every leverage threshold against the right supervisor.

What do I need to upload?

The borrower’s financial statements and the covenant package. Without them, the memo can describe the borrower and its market, but cannot test headroom against the real terms. With them, every ratio is computed on the definition the credit agreement uses.

Using AI for it

Can I use AI-written analysis in a formal credit memo?

Yes, as the analysis the memo rests on. Every ratio carries its definition, every figure its source, and the report is marked as generated by Caspr. The decision and the rating stay with your committee, and the memo is not a substitute for independent credit review.

Is it accurate enough for a credit decision?

It computes each ratio from the financials you add, on the definition stated beside it, and names anything it could not establish. It is not an examiner’s rating and does not replace independent credit review. The recommendation is argued, and the forecast carries its conditions.

Is the data current enough?

Market and borrower context comes from a curated corpus that live feeds keep current. The financials are yours, so the ratios are as current as the statements you add. For live trading levels on a loan or bond, it is not the tool.

Cost

What does a credit memo cost to produce?

A lender’s credit memo is written by its own credit team, so there is no market price to compare. The cost is the analyst’s time on each facility. We found no published price for an outsourced one. Caspr’s depth and price for each version are on its card above.

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