Hey monkeys,
I am doing an LBO model and the company has a fairly significant amount of leases as a result of IFRS 16 accounting. The leases should be included in EV and net debt. As the leases will be rolled over, how do I take this into account in the model? It is included in EV so it is included in uses. Should I add it to the sources part of the S&U table to reflect this?
It's rolled over, so you can indeed include it in souces indeed. Make sure to include the respective cashflows and deduct the lease balance at the end of the holding period to get to equity value again.
Hey,
Thanks - yes, will include leases in net debt at the end. What are you referring to when you say respective cash flows?
Lease payments
Yes, they are already included in the financials per the company's filings so no need to separate the lease payments out
Are you stupid? You forgot about GAAP's cap-ex requirement for FCF
your reply makes no sense
Who hurt you?
what are you talking about?
Agree with Rover-S - basically I think the uses and sources table will look something like the following
Background EV = 100 Debt = 50 Lease = 10 Cash = 10
Uses EV = 100 TX costs = 2 Min cash = 5 Total = 107
Sources Debt assumed = 50 Leases assumed = 10 Sponsor EqV = 47 Total = 107
Regarding the modelling part, 1) calculate the PV of the lease obligation and its corresponding right to use asset 2) project their future balance on the BS 3) link it to the lease expense on the P&L (i.e. RTU amort. + and rent derived from the interest rate used to calculate the PV of the lease) and CFS (i.e. lease obligation amort.)
This is how I would do it and hope this helps!
Agree with this - optically speaking would also split out the leases component of the EV in the Uses to make it clear that they're being rolled over (i.e. appear clearly in both the Sources and Uses)
Very helpful, just so I understand, does the following work as well in your example?
Uses EV = 90 Leases = 10 TX costs = 2 Min cash = 5 Total = 107
Sources Debt assumed = 50 Leases assumed = 10 Sponsor EqV = 47 Total = 107
Hey,
Yes that is how I would approach it too.
Can you elaborate on how you would project the future balance of the leases on the BS? If in a 3 h LBO modelling test, isn't better to keep it flat although it is unrealistic and "incorrect"?
That appears to by how most broker reports forecast these items (i.e. flat)
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