MT482 Unit 8 Term Loan Credit Analysis Memo Example

$45 Million for 180 Digital Faces: An MT482 Unit 8 Credit Analysis Memo on a Billboard Company's Capacity to Repay

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Purdue University Global

MT482: Financial Statement Analysis

Unit 8 Credit Analysis Memo

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[Date]

Wabash Outdoor, the bank and every figure are composite; the sources cited are real.

Memo Header

To: Senior Credit Officer, Lakeshore Commercial Bank. From: Credit Analyst. Date: February 16, 2026. Subject: Wabash Outdoor, request for a $45 million term loan.

The Request

Wabash Outdoor, the composite regional billboard operator, requests a $45 million seven-year term loan at 7.4 percent, amortizing 5 percent of the original amount each year, $2.25 million, with the balance due at maturity. The proceeds would convert 180 of its best-located bulletins to digital faces at about $250,000 each.

Recommendation

Approve, subject to the covenants below. The project earns a strong return, the company's cash flow covers its debt service comfortably and the added debt raises its debt ratio only modestly.

What the Conversions Earn

A mature digital face at Wabash earns about $154,461 a year. The company expects newly converted faces to reach about 70 percent of that, $108,123, because they sit in somewhat smaller markets. After subtracting the bulletin revenue each conversion replaces and the higher ground rent, power and sales commissions a digital face carries, each conversion should add about $47,556 of EBITDA a year. Across 180 faces, that is about $8.56 million, a pre-tax return of about 19.0 percent on $45 million.

Capacity to Repay

Year-one EBITDA, counting half the conversion benefit because faces come online through the year, would be about $167.83 million. Debt service would total about $57.95 million: interest of $44.1 million on existing debt, about $3.33 million on the new loan and scheduled principal of $8.27 million on existing debt plus $2.25 million on the new loan.

Cash available for debt service, EBITDA less maintenance capital spending of $14.6 million and cash taxes of about $12.98 million, is about $140.25 million. That covers debt service 2.42 times in year one and about 2.49 times once all faces are running.

Even before the new faces earn a full year, cash covers every scheduled payment almost two and a half times.

Debt Relative to Earnings

Net debt would rise from $661.77 million to about $706.77 million. Against year-one EBITDA, net debt to EBITDA moves from 4.05 to about 4.21 times, inside the existing 5.5 times limit and well below the peer level that concerns lenders in this industry.

The Stress Case

In the stress year used in Unit 4, revenue falls 16 percent. With half the conversions online, EBITDA would fall to about $112 million and net debt to EBITDA would reach about 6.31 times, breaching the existing 5.5 times covenant. That breach would occur with or without this loan; the new debt adds about a quarter of a turn. Debt service coverage in that year would still exceed 1.5 times, so the company could keep paying. The risk to the bank is a covenant default rather than a missed payment. Subramanyam (2014) treats cash flow coverage and indebtedness as the core of credit analysis, and both hold up in the base case. Altman (1968) showed that indebtedness, profitability and liquidity together signal distress better than any one ratio, and on all three Wabash remains far from the danger zone outside a severe recession.

Collateral and Structure

The loan would rank equally with the existing secured facility and share its security in the company's structures and site leases. Digital screens are less durable than steel structures and lose value faster, so the seven-year term, shorter than the screens' expected life of about ten years, keeps the loan amortizing ahead of the collateral's decline. A cross-default clause with the existing facility would let the bank act if the larger lenders do.

Proposed Covenants

First, maximum net debt to EBITDA of 5.0 times trailing EBITDA, stepping down to 4.5 times after two years, tighter than the existing facility so the bank sees trouble earlier. Second, a minimum fixed-charge coverage of 1.5 times, counting ground rent. Third, dividends limited to 50 percent of free cash flow whenever net debt to EBITDA exceeds 4.75 times. Fourth, proceeds restricted to conversions, with quarterly reports of revenue per converted face against the $108,123 plan.

Risks

Digital revenue could fall short if advertisers in smaller markets resist digital pricing. Interest rates on the existing floating debt could rise. And local permitting for digital faces sometimes stalls. The reporting covenant gives the bank early warning on the first risk. Fridson and Alvarez (2022) stress that lenders should test whether new investment earns its projected return before relying on it, which the quarterly reports allow.

References

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. The Journal of Finance, 23(4), 589-609. https://doi.org/10.1111/j.1540-6261.1968.tb00843.x

Fridson, M. S., & Alvarez, F. (2022). Financial statement analysis: A practitioner's guide (5th ed.). Wiley.

Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.