Restructuring Interview Questions from Superday

I have a friend who just went through restructuring super day and wanted to get answers to these 5 questions:

  1. If a firm has a leverage ratio of 5x and it has an interest coverage ratio of 5x, what is the firm's interest rate?

  2. First lien 100m
    Second lien 100m
    50m EBITDA
    Multiple of 8x
    Interest expense of 8%

I'm taking the role of the second lien. What percent of equity do you need to get to receive 150% percent cash on cash return at year 4?

  1. How does 5 million added affect the 3 financial statements?

  2. If you have 150m in Enterprise value, 20 mil in cash, 100million in secured, 100 in junior sub loan What is the junior sub loan trading at?

4b. Same situation described above for 5 years, par value is 100, coupon is 10%, what is the YTM of the sub loan?

  1. Given an operating income of 40, depreciation of 10, interest expense of 15, and capex of 15, what's the levered FCF?

5b. If the company has 400 in debt, what's the leverage ratio?

Comments (9)

Apr 12, 2020 - 10:09am
WSO Monkey Bot, what's your opinion? Comment below:

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Apr 19, 2020 - 10:29am
finessefinance, what's your opinion? Comment below:

Here is my attempt at the questions, could be wrong happy to discuss with anyone or op.

  1. Depends on formal definition of leverage ratio, but assuming debt/EBIT is implied then we can setup two simple equations debt/EBIT =5 and EBIT / (Debt * interest rate) = 5, solve to find interest rate is 4%.

  2. Again not 100% sure what the question is implying, but EV is 400 = 8*50, over 4 years collect 32m in cash interest, to get 150% MOIC at year 4 thus need additional 12 in principal appreciation, i.e. of the outstanding 200 equity would need 12/200 approx. 5.5%

  3. super vague, but income statement not affected by equity financing, debt financing take into account interest expense from new issuance, tax effect (ITS) to find NI. SCF consider if PIK debt (add back interest expense) otherwise in CFF add in CF from issuance, on Balance sheet record higher Liab / APIC which is offset by increaed cash balance thanks to issuance.

  4. EV is already excluding cash (maybe ask to check). secured is above junior in capital structure assuming no structural subordination or equitable subordination. Since fulcrum security and absolute priority rule, 50m of EV to cover 100m of claims, means it should trade 50c on the dollar.

4b. Assuming MV of 50, YTM = (10 + (100-50)/5) / 150/2 = 42% ?

  1. Assuming operating income is EBIT then add back depreciation (Non cash expense) and deduct capex to get UFCF = 35. Then deduct of interest expense but add back interest tax shield, net down by 9 assuming 40% tax rate. LFCF = 26.

5b Leverage ratio generally defined as through on EBITDA, i.e. DEBT / EBITDA. Thus find EBITDA is 50, DEBT is 400, so Leverage ratio of 8.0x

Would be happy to hear ifothers agree disagree

Apr 19, 2020 - 4:21pm
accruedinterest, what's your opinion? Comment below:

I'm going to give it a shot.

  1. Agree with above

  2. Agree with above, but need $18 worth of Equity Value ($18+$32 of interest) to get 150% MOIC so 18/200=9% of equity

  3. Agree with above

  4. I believe you add cash to EV to get total distributable value of $170 -$100 of secured =$70 to junior sub loan, so it should be trading at $70

4b. YTM =(10%=(100%-70%)/5)/(70% +100%)/2= (10% +6%)/(80%)=20% YTM

  1. Agree with the above

5b. Agree with the above

Apr 19, 2020 - 4:33pm
hongkong2030, what's your opinion? Comment below:

I don't quite follow an answer to question 5. Where is tax being deducted in your calculations? You get to UFCF of 35, then you deduct interest (adjusted for tax shield) but shouldn't we deduct higher tax amount? It's not just tax shield we are paying, no?

The way I looked at it was:

EBIT=40 - interest (assumed cash expense) PBT =25 - Tax (including tax shield impact) Net income = 15 + D&A = 25 - Capex = 10 (LFCF)

Great if someone could correct my thinking here

Apr 19, 2020 - 4:38pm
xtentaxion, what's your opinion? Comment below:

can u pm me? have a question about rx superdays


Apr 19, 2020 - 4:52pm
ValuePro, what's your opinion? Comment below:

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