Hi all, appreciate your help on the below.
In a standard LBO, calculating the IRR of the equity is straightforward - simply getting the XIRR of equity cash flows at each period (initial outlay, dividends, exit proceeds).
I assume the same principle applies to credit / debt? i.e. for a specific tranche of debt, you would look at the initial debt (cash outflow from the perspective of the credit investor), cash interest expense received and any scheduled amortization (cash inflow from the perspective of the credit investor), and the final repayment of remaining debt at exit.
In other words, senior debt with 5% interest and bullet repayment would essentially yield a 5% IRR (higher with some scheduled amortization).
Don't see why it would be any different but just wanted to confirm if I'm missing anything, given I've never done it before.
That's correct!
Exactly. But you need to consider LIBOR Floors, exit fees or call premiums, OIDS, that all act as yield enhancers. Therefore, cash interest will rarely = IRR, particularly in the leveraged loan market.
Thanks, that makes sense.
How would any financing fees be viewed?
OID/fees at origination . If your working on Mezz don't forget to PIK the debt which would increase each interest payment due ot the increasing debt size as well as higher payment at close. Also if there are any prepayment fees for early retirement these would be paid out at close.
Bump! Also interested in some color on this :)
Usually loans have the features mentioned above (base rate floors, OID, call premium, make-whole) which make yield =/= interest. Also interest can be PIK or cash.
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