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20x EBITDA implies a younger company, with a significant equity story.
Using this profile, I'll broaden the framework to help guide to a financing structure:
Let's say the company has $5mm EBITDA - which means with 10x leverage, your putting on $50mm in debt priced at L+600-700 (priced higher because of the high debt burden; with 1.25% floor) - overall cost of debt is 7.5%.
With these assumptions, interest payments plus a 1% amort equates to $4.25mm of fixed payments that need to be serviced annually; not including taxes and capex, which further eat into your cash flows and likely produce negative FCF generation. Remember this doesn't even include the high cost of financing associated with any subordinated debt that may be layered beneath the senior. Projecting this out for 5 years, you will find the company fails to delever. Any deterioration in EBITDA will further augment leverage, and the lofty valuation wont help with recovery prospects, which will constrain the leverage appetite you specified.
Also, bank debt usually never exceeds 50% of enterprise value - I doubt the structure you laid out would work. Lenders just wouldn't get comfortable with 10x senior leverage.You generally see a cap of 30% - 40% of cap for this tranche, as the company will likely also have additional subordinated debt beneath the senior bank debt.
If this a hypothetical case, or even a real company situation, I would use this logic to form a view without any other information at my disposal.
So in general, if 40% of capital structure can be financed with bank debt for a large mega buyout, then safe to say 20-30% will be financed with sub / mezz?
What would the interest expense for sub / mezz look like? Maybe 8-9% for sub in cash interest and 10% cash / 5% PIK for mezz?
Generally, you see 60-65% of debt-to-cap; 40% senior and 20% sub.
When you say "mega" buyout, the target companies don't typically need mezz/private debt as they are large and have access to the public HY market. Hence, pricing will be in the form of a cash-pay coupon. Depending on where the senior is priced at (in terms of all-in yield), you can expect the bondholders, who will have an unsecured claim, to be priced atleast 300 bps wider, especially in a good market like now. In a tougher market, bonds price wider then this level - depends on structure, credit quality, prevailing market conditions, etc.
Mezz is for MM companies, who are typical unable to raise the minimum level required to issue high yield, and/or don't want to be rated. If you issue a bond, the rating agencies need to get involved and rate the tranche debt.
I haven't seen 10% cash / 5% PIK for mezz in awhile, especially in a good market like now. More like 10-11% cash/ and 1-2% pik.
Thanks johnny_quest. For senior, what is the usual amortization profile like? Straight line 100% pay down over 5 years?
Also is HY debt the same as sub debt?
Senior: TLB is 1%, TLA is typically 5%+.
You wouldn't get 10x leverage now, and generally credit guys don't like forward look EBITDAs in low/no contracted businesses. What you would be using is prefs that share on upside
I don't think you would ever see 10x senior leverage (I work in lending). If they're paying interest and amort on 10x leverage no problem then it's not going to be 10x leverage for very long, just doesn't mathematically make much sense.
Agreed - most you're seeing at the top end is 8.0x total leverage with maybe 4.5 to 5.0x senior maxed out. More realistically for a company described with weaker credit metrics at an earlier stage, you're probably talking closer to 4.0-4.5x Senior with Junior the remaining 1.5-3.0x. Again very subjective to the situation. Also don't think unsec'd would come 300bps back of the TLB for a $5MM EBITDA company - more like 400bps.
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