What exactly does refinancing debt mean?
In the context of an LBO, I initially thought refinancing debt meant to replace existing debt with new debt that has fairly similar terms. But now, reading through the guides, BIWS says “Refinancing Debt means that the PE firm repays it using Investor Equity or some combination of Investor Equity and New Debt" while "Assuming Debt means that the PE firm keeps the existing Debt in place, or that it replaces it with new, identical Debt."
It seems like it's saying that refinancing debt = repaying debt, whereas assuming debt = keeping existing debt or replacing it with identical debt. I've always thought refinancing and repaying were two different things, so I'm getting pretty confused over what refinancing debt really means. Any help is appreciated here.
When a PE firm buys a company, they are buying both the debt and equity and then employ their preferred capital structure. However, sometimes they may just keep the existing debt and purely buy the equity.
Refinancing the debt just means that you pay off existing obligations and obtain new debt. So refinancing is "repaying", but also with the intention of getting more debt.
Thanks for the explanation. So if assuming debt also refers to "replacing existing debt with new, identical debt," what would be the difference between assuming debt and refinancing debt (since refinancing is getting new debt that is very similar to existing debt, and then using proceeds of that new debt to repay the existing debt)?
You refinance debt to get more favorable terms. If you have $100 of debt paying 10% in interest, you could refinance it with $100 of debt paying 9% in interest. You do this by bringing on the additional $100 of debt paying 9% and immediately use it to pay off the $100 paying 10%. With your original post, it sounds like they’re defining refinancing to where it doesn’t necessarily need to be replaced by debt. So you could refinance your $100 of debt paying 10% with $50 of debt at 9% and $50 of equity.
The other reason to refinance is when you have debt about to expire (meaning you need to pay it back). If your $100 of debt expires this year, you could raise another $100 to pay off your other debt. This is called “rolling” your debt.
Assuming debt means you’re keeping the debt
Refinancing debt means you’re paying off the existing debt and replacing it with a new tranche or tranches
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