Debt assumptions in software LBOs
Hi all,
I have an upcoming case study where I will have to do a software LBO and come up with assumptions on financing etc.
Not familiar with debt assumptions for large cap software LBOs and trying to triangulate the right metrics from recent take-privates on google. It seems that recent transactions for c.10-20% growth software companies, we would have the below:
- 7-15x Adj. EBITDA (representing 40-50% of sources)
- S+ 300-350 TL (1st-lien) and S+ 500-550 TL (second-lien) // for 8x EBITDA let's say 6x 1st lien and 2x 2nd lien?
- OID 0.95
My questions
- Do the above assumptions make sense for a case study? What would you use?
- How do you get the target leverage, do you calculate the purchase price based on 15-20% target IRR, and use 30-50% debt financing based on cashflow generation to reach a leverage ratio that makes sense?
- Dumb questions but I see 1st-lien / 2nd-lien a lot but what are these backed with for software companies as they have little fixed assets? Or does 1st-lien/2nd-lien basically mean TLA/TLB?
- How would these look like on ARR loans ? TLB of 2.5-3x ARR at S+ 600-650 bps?
- What are the RCF facilities priced at? Same as first-lien debt?
Many thanks!
Just trying to give my thoughts here, somebody pls correct me if wrong
I think the assumptions are generally fine, don't know why you're saying 7x - 15x and then later 6x/8x for 1L/2L. The latter definitely makes sense, but is at the latter end.
For pricing I'd go a bit higher 400 - 500 for 1L and 600 - 700 for 2L if you actually go with those leverage numbers
Generally yes, you have to change the debt size to get to a reasonable leverage level. PE obviously tries to get that number as high as possible while the bankers try to agree to a leverage level that will allow the credit to be sold in the market.
They don't differ in terms of backing, 2L is just subordinated so they only get paid after all debt above them in the waterfall is repaid. 1L is a TLB, 2L could actually just be a subordinated debt or something more complicated like PIK
Can't really give any input in terms of ARR loans
Generally 50bps below TLB at 30% if not drawn
Hope this helps
Thanks! What do you mean 50bps below TLB at 30%? Like revolver capacity should be 30% of TLB and price 50bps below?
You price the RCF 50bps below your TLB but only charge 30% of that on the undrawn but commited portion of the RCF. Everything drawn pays 100%
The facility size itself depends on the business but software generally needs less RCF
So if you pay say 9% on your 1L, you have RCF at 8.5% and you would pay a 2.8% commitment fee on undrawn RCF?
Seems excessive, aren’t commitment fees in the 0.25% range usually ?
Yes should say 3% so then it's 28bps, but can also just use 25 or 50 for a nice number
Ahh yes 3% ok, so you pay a 0.25% interest rate effectively which makes more sense
ARR facilities in the 1.5-2.5x range are typical assumptions for 1-5Bn software LBOs.
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