Debt Prepayment Penalty in LBO
Did a recent modelling test which had a debt prepayment penalty clause on a buyout. Is this cost normally bored by the buyer or seller?
I am guessing buyer, and if so how will this impact the LBO?
Just an intern but taking a stab intuitively wouldn’t you just add the penalty to your debt to pay down (like PIK I guess) unless it’s amortized/dictated to be treated differently by the credit agreements?
Prepayment penalty is borne by the party who has the debt, so the seller. It’s essentially just increase to the remaining debt at the time of the prepayment.
Flows through opening B/S same as a transaction fee
Thanks for this. A few other questions:
1. Does this impact sources and uses table like the transaction fees? I am guessing not given the seller will pay for this
2. PF financial statement - what is the other entry apart from a decrease in equity? Is it increase in debt and decrease in equity?
3. Purchase price impact - since this is bore by the seller there will be no impact?
If i'm understanding correctly, this expense would be incurred by the buyer who would have to increase their equity check size (use of cash) making total uses increase. In PF B/S you would need only subtract the repayment costs from the BV of equity. That is if cost is paid for by the buyer (which in case studies online seems to be what you are going for). There is no PF income statement adjustments.
Unless otherwise noted, like below, you should assume the above ^.
Thanks! It is for a LBO test, so will assume it is a buyers cost
It depends how the sale is structured. A common structure for the seller is to deliver a "debt free / cash free" balance sheet at closing. So the prepayment penalty will effectively come out of the seller proceeds as the seller pays off the debt to deliver a debt free closing balance sheet. Sometimes the buyer/seller/lender will negotiate to roll the debt, so as part of that negotiation buyer could maybe pay some penalty, but for a vanilla LBO I would take it out of seller proceeds.
You cannot capitalize this cost as the debt no longer exists.
Agreed. Fee should come out of seller proceeds almost every time unless it was some sort of atypical negotiating point.
Isn’t this only the case if it is CFDF close?
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