Questions on a litigation finance case study

A London-based hedge fund is seeking to invest $100m into a litigation funding vehicle that has been newly established by its current owners with a $20m common equity injection. The current owners have also taken out a $10m, four year term loan with a well-known lender at LIBOR plus 3.5%, amortising quarterly on a straight line basis, with interest also payable quarterly in cash.

Of the $100m capital injection, the hedge fund is seeking to invest $50m in the form of common equity and $50m in the form of a debt instrument that will sit junior to the existing term loan. The proposed terms of the debt instrument are as follows: • Five year term, bullet repayment; • Payment in kind interest cost of 8% (non-cash, rolled up); • The capital is to be drawn by the vehicle as required for investment into new litigation cases; and • A 2% commitment fee payable is on undrawn capital (non-cash, rolled up onto the principal balance) You should assume that of the $130m day one capital, $120m is available for deployment into the financing of new cases, with the remaining capital available to operating costs and interest payments on the term loan. The current owner of the vehicle has a good track record and we can assume in relation to the case performance: • Average duration of 18 months; • Average MOIC (multiple of invested capital) of 2.5x; • Average case success rate of 80%; and • The funder is able to deploy a maximum of $40m in the first year into new cases given its current operating cost base (assume operating costs of $3m per annum in the first year), which it can scale up by $10m per year thereafter (with a proportionate increase in the cost base to accommodate this). Cash proceeds from case completions can be recycled into new case investments (subject to the limit above). Task • Build a quarterly model, with a ten year time horizon showing a high level income statement, balance sheet and cash flow statement for the vehicle. • Assume the vehicle accounts for its case investments at cost i.e. no fair value mark ups are applied through the life of the case and income is only recognised on case completion.

So my questions are: 1) How do I know when to use the $50m Junior Financing - should the HF's equity be used to invest first and when thats run out only then does financing from the revovler kick in? 2) For the re-investment part of the question, I presume that is referring to FCF 3) The quarterly aspect of the model is confusing for the $50m Junior Financing - non-cash interest is charged at 8% per year and commitment fees on undrawn capital at 2%, so does this mean the addition to the debt balance in each quarter is equal to the annual change in the debt balance divided by 4, since the debt?