Can anyone give me a rule of thumb for leverage levels to model during an LBO case study:
How much senior debt; how much sub debt? Along with rates please
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4-5x senior with 5-6x tops structure. Obviously depends on business/industry but along those lines. Minimum 1.4x FCCR at launch as well.
1.4x FCCR is high. I've seen several get done at the 1.1x. It all depends on how quickly deleveraging takes place.
1.4x is not high, at least not in Europe. I don't know about the US.
Sonny's comment above isn't totally off base for a company with solid FCF and ~average cost of capital, but the amount of debt you can put on a business and the rates are entirely dependent on the situation (and the risk tolerance of the buyer). There are some industries that are true dogs (e.g. publishing companies might only be worth 4x EBITDA) that can support very little leverage. Whereas high growth and high FCF companies (e.g. data centers that might trade in the low-mid teens) might be able to support 7x leverage. If you want specifics, it would be helpful to give us some guidance.
On top of this, size does matter. You aren't going to lever a $5mm EBITDA business with 6-7 turns of debt.
Like above said, there isn't a general rule of thumb because things vary based on the company and current market. There's a ton of research put out by accounting firms and financial data companies (e.g. Pitchbook) that will give you recent leverage stats.
FCCR 1.4 Seems very high, I haven't seen anything over 1.25 in years. most are around 1.1. Total Leverage, since we don't have a specific industry, i would use the FDIC guidelines of 3X Senior, 4X Total and typically anything above 6X will bring FDIC scrutiny. I have seen things structured well outside of this, but there needs to be a reason. Will PMI work in year one drive earnings of the consolidated entity to support higher EBITDA payments? Also to take into consideration is the PE firm and the lending bank's relationship. If the PE has a history of walking away from bad investments, leverage will be tighter, if one bank handles the whole portfolio and does the fund's banking and the PE has a history of putting in mezzanine pieces or bridge lending, the leverage can go much higher.
Most of my work is loan size 10-25M, for $200M loans, its a different set of rules.
Forget about turns. More generally, think about LTV on an EV basis. You'll generally need approximately 30% equity (depends on the deal, but generally 25%-40%), with generally 50-60% of EV as senior (maybe 70%, but that's more he exception than the rule), and mezz as the plug. Remember lenders want a significant equity cushion to EV, which, if you're thinking about it from a FCCR or debt/Ebitda perspective, doesn't have to exist.
This is spot on. We concentrate solely on turns for very small mm deals but most mm and large corp deals we look at EV, though we still have to pay attention to turns due to leveraged lending guidance. I will say we still expect FCCR to be 1.1x or higher at close.
Banks DO care about coverage ratios (DSCR, FCCR) because they want the borrower to be able to service the debt Banks DO care about leverage ratios (Debt / EBITDA) because this is psychology you can't deny. They also use comps for leverage multiples. Banks DO care about what proportion of EV they fund, because as you rightly said they need equity cushion, not only to give them comfort that liquidation valuation will be enough to pay off the debt, but also to make sure that shareholders have skin in the game and will prudently run the company
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