Debt sizing and pricing
I’m an IB analyst with some exposure to credit / RX but trying to get a better handle on PC, especially in the context of case studies / model tests.
So, it looks like in a model test I can either do a revolver & TLB w/ senior unsecured notes or a simplified revolver and unitranche structure.
My confusion on pricing in a case study comes from how important the size of the company / industry operates in.
For example, I’m thinking pricing as below:
Revolver: S+300
TLB: S+400
Unitranche: S+500
I suppose the above would be if I’m in a timed live test. If I’m in a case study setting, then I suppose I can use the terminal and look at some debt comps (public companies at similar size and industry) for pricing.
As for debt sizing on entry, I’ve the EBITDA and TEV so I can target a 5x leverage ratio on the Unitranche and then the rest is in equity. Similarly 3x on TLB and 2x on senior secured notes and rest on equity.
Is that the right way of thinking of pricing and sizing on entry?
Prior threads have a few different ways of going about this on sizing and then outdated views of pricing. Just trying to be in a spot where my pricing & sizing assumptions aren’t too off to the point it rly detracts from the model.
Any help would be very much appreciated!
Based on the most helpful WSO content, your approach to debt sizing and pricing in a case study or model test is on the right track, but here are some refinements and insights to ensure your assumptions are reasonable and aligned with industry norms:
Debt Sizing
Leverage Ratios:
Industry Considerations:
Equity Contribution:
Debt Pricing
Indicative Pricing:
Case Study Adjustments:
Key Considerations
Final Tips
By following these guidelines, your pricing and sizing assumptions should be well within the range of what is considered reasonable and won't detract from your model.
Sources: Creating own LBO assumptions, https://www.wallstreetoasis.com/forum/investment-banking/how-to-prepare-for-restructuring-technical-questions?customgpt=1, Private Credit Resources and Prep, Distressed publicly traded credit - case study help needed!, Reasonable entry multiple for buyout target?
Pricing generally is market driven, i.e. having a solid feeling / ask people in the space what pricing levels currently are should be good enough.
Debt sizing (at least in PC) should be based on looking at the available cashflows. 5x net leverage for a software company is usually on the lower end, but way too much for other business models.
Thanks very helpful!
Yeah, looking generically at services business, seems like 4.00x / 4.25x seams to be a bit more reasonable
Leverage levels for service businesses can vary quite a bit depending on service type and recurring share. There are service companies we financed with above 5x, but there are other services companies which will only get a 3x bank financing. Generically, 4-4.5x seems fine.
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