When building an LBO how do you determine what portion to attribute to debt and what portion to attribute to equity when building the model?
Also how do would you determine different types of debt used/coinciding interest rates?
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Debt comps
For the purposes of training (practicing LBO/case study for interviews) you could take two approaches:
1) Allocate a % of it to debt and % to equity. Generally the split would be ~60-65% debt and ~30-35% equity
2) Have a target leverage (generally during the process you'll get guidance from the bankers on expected leverage) and then the rest will be filled with equity. So if a company is going to be sold for 20.0x and a banker gave you 6.0x leverage guidance the remainder of the 14.0x will be filled with equity
Once you have your debt amount generally split it into two tranches TLA which would be about 60-75% of the debt (~L + 450bps) and then a second lien will fill up the rest (L + 600 bps, or ~8%). You'll get a better sense of rates/splits of debt tranches the more deals you work on whether its in IB or in PE
Thank you this is really helpful! This may be a dumb question but when someone refers to LIBOR is there a standard one used like 3m or 12m rate?
I think the interest rates have been causing the most issue for me so I appreciate those reference numbers.
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