DCF for Debt Offering
Under what scenarios would you, as an analyst, have to create a DCF for a debt offering? Would it be more of a formality?
Under what scenarios would you, as an analyst, have to create a DCF for a debt offering? Would it be more of a formality?
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DCF models are not used as such. You do look into free cash flows, but you have no need to discount them or to arrive at a valuation as your main objective is to measure the company's ability to pay back debt and see how different bond features may interfere with the issuer (for instance, looking at the liquidity impact of a sinking fund). A notable exception is that of "Convertible bonds" where you indeed can run a DCF valuation to guide you in selecting a conversion price.
These models are hardly seen in investment grade issuers (expect refinancing, frequent issuers, etc) and are far more common in high yield deals and those related to funding an acquisition (including LBOs)
Models are almost always used by the people taking the credit risk, but the DCM analysts never do DCFs afaik (correct me if im wrong).
As stated above, cash flows are important - so making a circular model that amortizes the term loans & revolver and pays off any maturities is important. PV of those cash flows is irrelevant (unless no comps exist and you are trying to determine EV - but thats a stretch).
If you're doing a levfin deal, you'll make an LBO model, which could easily be extended to a DCF if you wanted to.
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