I am building my first lbo model and I am wondering if you guys can provide me with or tell me how to find current rates for:
-Term loan for BBB-rated consumer discretionary company -Subordinated notes for same company
Thanks!
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current rates mean little for lbo's because the entire capital structure is changing. the term loan's almost certainly not going to be investment grade post-transaction.
at the most basic level, you estimate current pricing by looking at comps
For question 1, you call up the corporate banker for consumer discretionary. For question 2, you use comps and then figure out how your company stacks up relative to those comps.
it's not even corporate banking - once you LBO a company you get into leveraged loans / high-yield territory (i.e. not-investment-grade). Besides, there are so many more things than rating and sector - i.e. size, cyclicality, market share / position / dynamics, etc. You need to talk to capital markets really (if this is a real project / transaction)
If you're just doing this for learning purposes (i.e. practice). - you can probably use L + 500 (L = LIBOR for the uninitiated) for the term loan with a 1.5% LIBOR floor and maybe 8 - 10% on the sub notes (depending on total leverage). That said, these are only barely grounded in reality - don't come back crying if your MD slaps you for these. Let me repeat, illustrative only.
DaCarez has it right on this, although I'd say his 500bps term loan spread is a little too high. Loan market is white hot right now and you could probably do better. Anyway, you won't get slapped for using these rates in a model...someone may just tell you to adjust them a bit.
Like he said, also need to consider a lot of company and sector specific factors. Ask someone from your cap markets group or someone in a LevFin or sponsors group. You'd also do yourself well to learn more about how these yields are determined. It always amazes me how little bankers know about credit outside of LevFin or Sponsors groups...
Somebody on WSO showed me this data from Churchill FInancial, it's pretty good for the senior debt portion of the question
http://www.churchillfinco.com/otl_index.html
What's a typical interest rate spread for a large-cap LBO? (Originally Posted: 09/28/2007)
Sorry, I don't work in PE
suggest a look to the FDC transaction, where the B-1 tranche px'ed L+275 with a 4 point OID. Factoring the OID, an implied interest spread for the B-1 tranche would be around L+325. Swapped to fixed, this would imply a yield of around 9% for secured 7yr paper.
great answer, thanks
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