Private Credit Underwriting: Connecting Deals to Monitoring

Private Credit Underwriting: Connecting Deals to Monitoring

Private credit decisions move through a chain of evidence: borrower performance, facility structure, covenant definitions, downside assumptions, recovery expectations, returns, and ongoing portfolio questions. When those elements split across a memo, workbook, data room, and monitoring notes, the team can lose the reasoning behind the original approval. The evidence loop keeps that reasoning connected from first screen to exit.

Private debt is evolving under mixed conditions. McKinsey's 2025 Global Private Markets Report recorded $166 billion of global private debt fundraising in 2024, down 22 percent year on year, while describing private debt as relatively resilient. The report covers private debt strategies, not every private credit activity. The narrower point for an underwriting team is that market growth does not remove the need for disciplined information and review.[1]

Private Credit Portfolio Management: Unifying Underwriting and Monitoring

The European Banking Authority's loan origination and monitoring guidelines apply to regulated institutions, not private credit managers. Their lifecycle principle still transfers: governance, creditworthiness assessment, prudent origination, and monitoring should operate as one system rather than separate exercises.[2]For a private lender, this means designing the portfolio review while the deal is still being underwritten. The approval case should specify what will be measured, how often, against which definitions, and what action follows a breach or deterioration.

Federal Reserve staff describe private credit as lending through instruments that are not publicly traded, often negotiated directly, usually floating rate, and commonly held to maturity because a liquid secondary market is absent.[3]Those features make both borrower evidence and instrument terms central to risk. Historical revenue, earnings quality, leverage, liquidity, collateral, pricing, maturity, amortisation, ranking, sponsor support, and information rights all belong in the underwriting record.

Reported data, normalized data, and analyst judgement should remain separate. An EBITDA adjustment needs a source, owner, date, rationale, and treatment in each scenario. A reviewer should be able to remove it without rebuilding the model. The same rule applies to pro forma synergies, run rate savings, working capital assumptions, and collateral values. A clean output is not evidence that the inputs were clean.

Automating Loan Covenant Tracking, Downside Stress, and Recovery Modeling

A covenant is a contractual calculation, not a generic warning threshold. Define the relevant measures, testing date, permitted adjustments, cure rights, scheduled covenant changes, and source documents. Store the definition beside the result. If a required metric is missing, report the test as unavailable rather than compliant. For supported Quant Lab cases, Resiliq can model structured covenant definitions and headroom analysis, while legal interpretation and enforceability remain matters for qualified counsel.

Stress revenue, margin, rates, working capital, capex, refinancing, and liquidity together. Then carry the resulting default path into recovery and lender return analysis. The Federal Reserve note highlights pressure from floating rate debt, illiquidity, limited market price discovery, and uncertainty around recovery, particularly for borrowers with fewer tangible assets.[3]Seniority alone is not a recovery model. Enterprise value, collateral quality, claims ahead of the facility, enforcement costs, timing, and restructuring options all need explicit assumptions.

Each model run should preserve the input snapshot, scenario name, methodology version, warnings, completion state, and output dimensions. That record links a borrower concern to projected covenant headroom, loss, cash yield, and total return without pretending the projection is certain.

Maintaining Credit Evidence Trails Across Deal Teams and Risk Committees

After close, portfolio review should not restart from a blank template. Bring forward the original covenant definitions, base and downside assumptions, unresolved diligence items, reporting obligations, and committee conditions. Compare each new borrower period with the approved case. A changed metric then has context: what the team expected, what moved, which scenario it now resembles, and whether the movement changes risk rating, reserve, engagement, or exit strategy.

Federal Reserve SR 20-13 is supervisory guidance for regulated institutions, but its emphasis on independent, ongoing credit review and clear communication to management is useful beyond banking.[4]The reviewer should be able to challenge risk ratings, exceptions, covenant status, valuation, and the persistence of underwriting adjustments. Independence need not mean a large separate department. It does mean that the deal sponsor cannot be the only person deciding whether the original thesis still holds.

The underwriting model may use one EBITDA definition while the monitoring workbook uses another. A downside case may assume an equity cure that never reaches the portfolio agenda. An adviser warning may sit in email while the final memo records only the adjusted number. A waiver may change future covenant tests without updating the model. These are coordination failures. Better mathematics cannot repair them after the evidence trail has split.

Structuring Inspectable Quarterly Credit Review Packs for Direct Lending

A useful review pack connects borrower evidence, facility structure, adjustments, covenant tests, stress cases, recovery assumptions, lender returns, approval conditions, amendments, and current review questions. It shows what changed since approval and who accepted the change. The artifact is illustrative, not a customer case study or a claim of unattended monitoring. Alerts and model outputs support professional review; they do not replace it.

No workflow can determine management credibility, legal enforceability, amendment strategy, sponsor behaviour, or recovery value across every situation. Credit professionals and specialist advisers still own those judgements. The system's job is to show the evidence, assumptions, alternatives, warnings, and decisions clearly enough that another qualified reviewer can challenge them.

Put one private credit case through Resiliq and keep the underwriting evidence, covenant assumptions, downside paths, and review questions connected as the case evolves.

Important notice

This article provides general information only. It is not investment, valuation, financial, legal, tax, accounting, financing, or other professional advice, recommendation, solicitation, or offer concerning any company, security, transaction, strategy, or product. Examples are illustrative and not forecasts. Resiliq references describe capabilities reviewed at the time of writing, not promises of future availability, performance, or outcomes.

References

1. McKinsey & Company, Global Private Markets Report 2025: Braced for shifting weather, 20 May 2025
2. European Banking Authority, Guidelines on loan origination and monitoring, EBA/GL/2020/06
3. Cai and Haque, Private Credit: Characteristics and Risks, Federal Reserve FEDS Notes, 2024
4. Federal Reserve, Interagency Guidance on Credit Risk Review Systems, SR 20-13, 2020