Debt Sizing Issue: Early Repayment
I am stuck on this one quirk of a deal I am working on. The sum of discounted CFADS is higher than the maximum LTV (which is really just backed into from a minimum sponsor equity percentage) per the T/S. The result is that paying back the loan using CFADS seems inappropriate without some additional gearing - the loan pays back early as the starting quantum is “clipped” by the LTV covenant.
Any clever ways to decrease in period amortization formulaically (not using a macro) to have the amortization go for the entire tenor? I tried multiplying the in period CFADS with the ratio of effective loan size by sum of discounted CFADS, and while this helped, the loan is still paid back early…
TIA
Based on the most helpful WSO content, here are some insights and potential solutions for your debt sizing issue:
Adjusting Amortization Schedule:
Dynamic Pro Forma Setup:
Loan Sizing Constraints:
Exit Analysis:
Terminal Value Calculation:
By implementing these strategies, you can better manage the amortization schedule and ensure the loan is paid off over the desired tenor without early repayment issues. Good luck with your deal!
Sources: Looking for Multifamily model with Loan Sizing Constraints, Multi-Family Acquisitions Excel Test, Trick (?) Technical Question, Rational behind a lender choosing a loan term, Real Estate Private Equity Technical Qs
Are you putting all of CADS towards servicing debt? If so, that is probably why the debt is being paid off early. Sponsor is only responsible for paying the loan interest + principal agreed upon in the credit agreement.
Thanks for your reply. You are absolutely right, but that is not really my question. I am more at a loss as how to formulaically and dynamically calculate amortization when not using all of CADS after interest. Understood it is likely multiplying in-period CADS by some percentage... but cannot seem to arrive at one. My other thought is backing into it using a goal seek or macro, but I would really rather not use either of those two functions.
In other words, "Sponsor is only responsible for paying loan interest + principal"... how would you recommend determining principal other than using CADS after interest?
Just take the max of either CFADS or x/tenor + interest?
Honestly I normally just write a macro to size based off of max leverage and the min DSCR, never had any issues with that. Essentially, it's just a goal seek that ensures that DSCR never goes below (for example) 1.40x during the lifecycle of an asset. To ensure that debt isn't paid off early, one solution is to just use the PMT family of functions and then set interest rate, debt amount, and num of periods over which the loan will be paid off. While I've never had any issues with this method, can't guarantee that it's foolproof.
What in the debt capital markets is going on in this thread
Sailor: where are you based / what type of co do you work for , if you don't mind me asking?
I cannot seem to PM you but happy to continue the discussion via PM.
You want to pro-rate the repayment profile
I believe Ed Bodmer's video covers this point - from minute 14:00 to 21/22:00
This is very helpful. Thanks!
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