GovernanceRehearsal

Kerrigan Industrial Solutions

GBP 180m syndicated RCF. Five-bank club. You are lead arranger.

Kerrigan manufactures specialty coatings for automotive and aerospace. Two customers represent 58% of revenue.

Q3 results landed this morning. Revenue down 11% year-on-year. EBITDA margin compressed from 18.2% to 14.6%. Management attributes this to input cost inflation and timing of aerospace contract renewals.

Current leverage: 3.4x against a 3.75x covenant. Next test in 8 weeks.

The borrower has not contacted you. There is no formal breach. The syndicate has not raised concerns.

You will make four decisions. There is no time limit.

Continue

Week 0

Q3 results show the trajectory. The covenant is not breached. The borrower has not raised anything. The next scheduled review is in 6 weeks.

What do you do?

Continue

Week 4

Kerrigan's largest customer (31% of revenue) has announced a strategic review of its coatings supply chain. No decisions have been made, but procurement contacts have gone quiet.

You now estimate Q4 EBITDA will come in below plan. Your internal model shows leverage at 3.9x - a technical breach - though management's forecast still shows 3.7x.

The covenant test is in 4 weeks.

What do you do?

Continue

Week 7

The borrower has now contacted you. The CFO requests an urgent call.

On the call, she informs you that Q4 EBITDA will result in leverage of 4.1x - a clear covenant breach. She is requesting a waiver and an amendment to reset the leverage covenant to 4.25x for two quarters.

She states the board is "fully committed to the business" and that aerospace contract renewals are expected in Q1 next year. No independent verification is offered.

The syndicate does not yet know about the breach.

The borrower is requesting a covenant waiver and reset. What position do you take?

Continue

Week 14

Kerrigan's largest customer has formally exited its coatings supply contract. Revenue impact is approximately GBP 28m annually. The aerospace renewals have not materialised.

The borrower's liquidity runway is now estimated at 5 months. A second covenant breach is certain. The syndicate is divided: two banks want to exit, one wants to accelerate.

You are lead lender with GBP 140m drawn on a deteriorating credit. What do you do now?

That was your final decision.

See what happened

Your decision sequence

By Week 14, the borrower's leverage had increased. The question is whether yours had too.

Decision by decision

Options at each stage

Optionality reduced at every stage. Most of the reduction was not caused by the borrower's deterioration. It was caused by decisions that did not use the leverage available at the time.

See an alternative path

An alternative sequence

Both sequences are plausible. Both contain defensible decisions. The difference is in what was available at Week 14.

Continue

This was one situation with four decisions over fourteen weeks.

Your teams face these situations with real exposure, real relationships, and real time pressure.

GovernanceRehearsal builds environments like this from your own portfolio history - so your teams can rehearse the decisions that matter before they are forced to make them.

Discuss a setup