Client Profile
A global senior secured debt fund with nearly $10 billion in invested capital, providing liquidity solutions through Asset-Based Loans, Term Loans, Factoring, Trade Finance, and Equipment Finance. The fund supports borrowers both domestically and internationally across a range of industries.
Engagement Overview
Our firm was engaged to conduct a quality of earnings (QoE) and forecast review on behalf of the Client in connection with a potential financing arrangement involving a U.S.-based land drilling company (Buyer) and a Target business operating in the same space.
Transaction Structure
The proposed transaction involved the Client providing senior secured debt to the Target, which was being acquired by the Buyer. The diligence was critical to validating the Target’s financial performance and supporting the Client’s investment decision.
Situation
At the time of engagement:
- The Target’s prior fiscal year audit was still in process, limiting access to finalized financials.
- Margin detail was not readily available, requiring supplemental analysis.
- The Client required independent validation of historical earnings and forecasted performance to inform credit structuring.
Scope of Work
Our review focused on delivering clarity around historical earnings quality and forecast reliability, despite incomplete audit documentation and limited internal reporting. Key workstreams included:
- Alternative Audit Procedures: With audited financials still underway, we conducted procedures to validate the integrity of unaudited financial data, including reconciliation and testing across income statement and balance sheet components.
- Custom Margin Analysis: In the absence of formal margin reporting, we constructed job-level and category-level margin analyses using available cost data to identify trends and evaluate profitability.
- Forecast Validation: We reviewed management’s projections, tested underlying assumptions, and assessed the impact of oil price fluctuations—given the business’s high correlation to crude oil market movements.
Solution
In the course of the engagement, our team addressed several critical financial and operational considerations:
- Customer Concentration: Identified that four customers represented a high and growing percentage of the Target’s revenue. We evaluated the impact of this concentration on revenue stability and future risk exposure.
- Capital Expenditures: Due to the age and condition of the Target’s drilling rigs, annual capital expenditures were materially high. We assessed historical capex levels and the forecasted need for near-term investment in rig maintenance and upgrades.
- Commodity Sensitivity: Given the Target’s direct tie to oilfield activity, we evaluated forecast sensitivity to fluctuations in crude oil prices and reviewed the potential downside risks to projected cash flows.
- EBITDA Adjustments: Identified and applied material adjustments to reported EBITDA across the analysis period, including corrections for missing or incorrectly calculated accruals and one-time charges not previously captured.
Outcome & Impact
Our analysis provided the Client with a thorough, risk-adjusted view of the Target’s financial performance and operating profile.
- Confirmed adjusted EBITDA and validated financials through alternative procedures
- Quantified and contextualized risk factors tied to customer concentration and rig lifecycle
- Provided clear documentation of material forecast risks and margin variability
Value Delivered
- Empowered the Client to proceed with a structured senior secured financing solution
- Delivered clarity and credibility in a transaction with incomplete audited records
- Provided actionable insights into operational, customer, and commodity-driven risks
- Reduced financial exposure through robust, independent diligence and risk-adjusted modeling
