Do sponsors prefer bullet financing or amortizing debt structures in LBOs?
M&A intern here ignore title.
it seems that sponsors prefer bullet financing in LBOs which I do not fully understand yet. I always thought deleveraging increases IRR?
Why do PEs want no amort in LBO financing?
Could be wrong; i think that some sponsors may prefer a bullet so that they can leak cash through a shareholder distribution at the end of each year, which would ultimately increase their IRR
Aren‘t dividends restricted due to the financing anyway? No lender would allow for dividends right?
not necessarily and not always; at some point there becomes a substantial “cash drag” on the business if cash is just sitting on the B/S
if i was a PE firm i would take a dividend if allowed, especially with a business that is not capital intensive / requires minimum reinvestment
No, if you're meeting covenants you can distribute cash...to juice IRR.
Why would you use a lender if you're just going to sit on excess cash...?
>implying debt has covenants
>in the year of our lord, two thousand and twenty six
depends on what is cheaper, meaning which one leads to the highest IRR
all else equal bullet is preferred because you can do recaps or reinvest in the business to increase value at exit
Why can’t I do a recap with amort debt?
you can do the recap, but you're channeling an extra portion of $ attributable to the amortization to creditors instead of channeling that $ to shareholders
the creditor's gain is the shareholder's loss (again ceteris paribus)
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