§ 01
| Warning Sign | Why It Matters | Severity |
|---|---|---|
| Declining EBITDA margins (3+ qtrs) | Cash flow generation is weakening | High |
| Rising leverage without growth | Borrowing to survive, not invest | High |
| Revolver draws | Tapping emergency credit lines | Very High |
| Dividend cuts/suspension | Preserving cash at equity holders' expense | High |
| CFO/CEO departure | Insiders leaving before problems surface | Medium–High |
| Covenant amendments | Lenders loosening terms (forbearance) | Very High |
| Supplier payment delays | Stretching payables to manage cash | High |
§ 02
The most dangerous phase is when a company starts drawing on its revolving credit facility while simultaneously cutting dividends. This combination signals severe cash flow stress and often precedes restructuring.
§ 03
Check a company’s most recent 10-Q for any revolver draws, covenant amendments, or changes to dividend policy. These are the canary in the coal mine for credit distress.
§ 04
A company’s EBITDA has declined for 4 quarters, it drew $200M on its revolver, and the CFO resigned. The stock is only down 15%. What should credit investors do?
§ 05
§ 06
Quarterly: leverage ratio rose from 3.5x to 4.5x. Interest coverage fell from 6x to 4x. Management attributes both to 'one-time working capital needs.' What's your disciplined reaction?
Five questions · AI feedback
Sit with the ideas.
A BB-rated company reports: EBITDA margin declining from 22% to 17% over 4 quarters, leverage rising from 4.5x to 5.8x, and it just drew $300M on its $500M revolver. What is the most appropriate action for a bond investor?
Why: