Company overview
Copperline HVAC Services repairs, maintains and replaces heating and air-conditioning systems for homes and small businesses across Texas, Oklahoma and Arkansas. About 60% of revenue comes from replacing systems, which customers can delay when money is tight; the other 40% comes from repairs and from 35,000 households on yearly maintenance plans, which renew at about 85% a year.
Bluestem Capital, a mid-market private equity firm, has agreed to buy Copperline from its founders for $280M, 8.75 times FY2025 EBITDA. Bluestem is putting in $140M of equity and asking for a $150M first-lien term loan. It also wants a $40M delayed-draw term loan (DDTL) to fund add-on acquisitions of smaller local HVAC companies over the next two years, Bluestem's main plan for growth.
Management's marketing materials show adjusted EBITDA of $35.5M: reported EBITDA of $32.0M plus $3.5M of add-backs for 'normalizing' the founders' pay and expected savings from buying equipment in bulk.
The IC question: is this a business you would lend to at this level of debt, which EBITDA should you use, and do the terms protect you if replacement demand slows or the acquisition plan adds debt faster than earnings?
Your memo should answer
- 01Would you approve this loan? State your recommendation and the main reasons.
- 02What are the two or three most important credit risks?
- 03Calculate leverage on reported and on adjusted EBITDA, interest coverage and free cash flow. Which EBITDA should the lender use, and why? Assume SOFR of 4.0%.
- 04Build a downside case: replacement revenue falls 20% and margins return to the FY2022 level. What happens to leverage, coverage and covenant headroom?
- 05Do the covenant, EBITDA definition and DDTL terms protect the lender? What would you change?
Financials ($M)
| FY2022 | FY2023 | FY2024 | FY2025 | |
|---|---|---|---|---|
| Revenue | 182 | 205 | 226 | 241 |
| EBITDA, reported | 22.5 | 26.0 | 29.5 | 32.0 |
| EBITDA margin | 12.4% | 12.7% | 13.1% | 13.3% |
| Capex | 3.0 | 3.4 | 3.8 | 4.0 |
| Cash taxes after the buyout, estimated | 2 | 2 | 2 | 2 |
| Change in working capital | (0.8) | (1.2) | (0.9) | (1.0) |
Term sheet
- Facilities
- $150M first-lien term loan, drawn at closing; $40M delayed-draw term loan for acquisitions, available for 24 months
- Sources and uses
- Sources: term loan $150M, Bluestem equity $140M. Uses: purchase price $280M, fees $7M, cash to the balance sheet $3M
- Tenor
- 6 years (2032)
- Pricing
- SOFR + 525 bp, 0.75% SOFR floor, 98.0 OID; the DDTL costs 1.0% a year on undrawn amounts
- Amortization
- 1% a year
- Financial covenant
- Maximum total net leverage 6.00x, tested quarterly, on 'Consolidated EBITDA' as defined
- EBITDA definition
- Allows add-backs for owner pay, expected cost savings (up to 20% of EBITDA, realized within 24 months) and pro forma EBITDA of acquired businesses
- DDTL conditions
- Each draw needs pro forma total leverage at or below 5.25x after the acquisition
- Pricing context
- Sponsor-backed first-lien loans to $25–50M EBITDA services companies recently priced at SOFR + 475 to 575 bp
Management adjusted EBITDA (FY2025, $M)
- Reported EBITDA
- 32.0
- Founder pay above a market CEO salary
- 1.2
- Expected savings from bulk equipment purchasing
- 2.3 (not yet achieved)
- Adjusted EBITDA
- 35.5
Business mix (FY2025)
- System replacements
- 60% of revenue; average ticket about $11,500; deferrable when households are under pressure
- Repairs and maintenance plans
- 40% of revenue; 35,000 plan members, about 85% renew each year
- Customers
- Over 90,000 households served in FY2025; no customer above 1% of revenue
- Technicians
- 410 licensed technicians; technician turnover 22% a year