What is private credit direct lending?

Private credit direct lending is a non-bank form of corporate lending where private credit funds (BDCs, insurance companies, credit funds) lend directly to middle-market companies, typically to support LBO transactions or growth capital needs. Direct loans are typically: senior secured (first lien), floating rate (SOFR + spread 450-700bps), $25M-$500M in size, 5-7 year term, and often hold-to-maturity (no secondary market liquidity). Private credit fills the gap left by regulated banks post-GFC, which face capital constraints on leveraged lending.

What EBITDA add-backs are acceptable in private credit underwriting?

Acceptable EBITDA add-backs in private credit: (1) One-time restructuring charges (non-recurring); (2) Stock-based compensation (non-cash); (3) Run-rate cost savings from completed actions (verifiable, on-going savings from specific, completed operational changes — not speculative); (4) Pro-forma EBITDA for completed acquisitions; (5) Management fees to sponsor (often added back as non-operational). Not acceptable: speculative cost savings, revenue synergies (too uncertain), and add-backs exceeding 20-25% of base EBITDA (caps are market standard). Lenders negotiate the add-back cap in the credit agreement.

AI for Private Credit Underwriting: Direct Lending Analysis, DSCR, and Deal Structuring with Claude (2026)

How private credit funds use Claude AI for direct lending underwriting: EBITDA add-back quality assessment, DSCR and leverage computation, loan covenant design, PIK toggle analysis, and quarterly monitoring template for middle-market credit portfolios.

Private Credit Underwriting and AI

Direct lending underwriting requires a comprehensive credit analysis: EBITDA quality assessment (add-back scrutiny), leverage test against market standards, DSCR analysis across scenarios, loan structure design (covenants, amortization, PIK features), and ongoing monitoring templates. Claude with ClaudeFinLab accelerates the underwriting memo — from deal screening to credit committee presentation.

EBITDA Quality and Add-Back Analysis

"Analyze EBITDA add-backs for middle-market software company seeking direct lending: management EBITDA $18.5M. Proposed add-backs: (1) Restructuring charges $1.8M — review documentation: one-time office closure, non-recurring, ACCEPT; (2) SBC $2.2M — non-cash, ACCEPT; (3) Cost savings from offshore transition $3.5M — 80% completed, run-rate established, ACCEPT $2.8M (80%); (4) Revenue synergies from acquisition $4.5M — speculative, not completed, REJECT; (5) Management fees $0.6M — standard PE sponsor fee, ACCEPT. Total accepted add-backs: $1.8M + $2.2M + $2.8M + $0.6M = $7.4M. Add-back as % of base: $7.4M / $18.5M = 40% — EXCEEDS 25% market standard cap. Negotiate cap at $4.6M (25% of base)."
"Test EBITDA sustainability: compare LTM EBITDA to 3-year average. LTM: $18.5M. Year -1: $15.2M. Year -2: $13.8M. Year -3: $11.2M. CAGR: +18.1%/year — consistent organic growth. Q4 run rate: $19.5M annualized — momentum positive. Assess customer concentration risk: top 5 customers = 54% of revenue ($12.5M). Largest single customer: 18% ($4.2M). EBITDA sensitivity to loss of largest customer: -$4.2M × contribution margin 75% = -$3.2M EBITDA impact = 17% reduction. Adjusted leverage for customer concentration risk."

Leverage and Coverage Analysis

"Compute credit metrics for this direct lending opportunity: LBO purchase price $135M (7.3x adj. EBITDA $18.5M). Capital structure: First Lien Term Loan $90M (4.9x leverage), Revolver $15M (undrawn), Equity $45M (33% equity cushion). Cash interest: SOFR ($5.25%) + 575bps = 11.0% on $90M = $9.9M. Mandatory amortization: 1% per year = $0.9M. DSCR: $18.5M EBITDA / ($9.9M interest + $0.9M amortization) = $18.5M / $10.8M = 1.71x. Compare to market standard (private credit minimum DSCR: 1.30x). Current DSCR 1.71x provides 31% cushion. At what EBITDA does DSCR hit 1.30x? Break-even EBITDA = 1.30x × $10.8M = $14.0M (24% decline from LTM — meaningful buffer)."

Loan Structure and Covenants

"Design the covenant package for this direct lending transaction: given 4.9x first lien leverage and 1.71x DSCR, propose: (1) Financial maintenance covenants: maximum first lien leverage 5.50x (tested quarterly, 60bps of headroom), minimum DSCR 1.20x (tested quarterly), minimum liquidity $5.0M (restricted cash + revolver availability); (2) Reporting: quarterly financial statements within 45 days, annual audit within 90 days, monthly management accounts within 30 days; (3) Excess cash flow sweep: 75% sweep of excess cash flow after permitted debt service; (4) EBITDA add-back cap: 25% of LTM EBITDA. Include equity cure: 2 cures of 4 quarters in any 12-month period."
"Analyze the PIK toggle feature: borrower requests PIK election for cash interest: in any quarter where liquidity falls below $8M, borrower may elect to PIK all or a portion of cash interest (adding to principal instead of paying cash). PIK rate: 13.0% (vs cash rate 11.0% — 200bps PIK premium). Model PIK for 2 quarters at current balance $90M: Quarter 1 PIK: $90M × 13.0% × 0.25 = $2.925M added to principal → $92.925M. Quarter 2 PIK: $92.925M × 13.0% × 0.25 = $3.020M → $95.945M. Lender's perspective: PIK is compounding and increases loss severity in default — requires larger discount to par on purchase price."

Loan Monitoring Template

"Design a quarterly loan monitoring template for a 15-loan private credit portfolio: for each credit: (1) Borrower name and loan summary (size, rate, maturity); (2) Q3 2025 EBITDA (LTM) vs underwriting case; (3) Current leverage vs covenant; (4) Current DSCR vs covenant; (5) Liquidity (cash + revolver availability); (6) Covenant headroom % (leverage headroom / leverage); (7) Performance vs underwriting assumptions (revenue growth vs plan, EBITDA margin vs plan); (8) Risk rating (1-5 scale: 1=watch list, 5=performing in-line); (9) Notable developments (management change, customer loss, etc.). Export as structured table for quarterly credit committee."

Where to Start

For a new deal, start with the EBITDA quality analysis. Paste the borrower's management EBITDA and all proposed add-backs, and ask Claude to evaluate each add-back against private credit market standards — which ones are acceptable, which need reduction, and whether the total add-back exceeds the typical 20-25% cap. Once you have the adjusted EBITDA, the leverage and DSCR analysis follows directly from the proposed capital structure.

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