LBO Model: Negative FCF Available for non-revolver debt paydown?
Going through some LBO models and came across a situation where my template model seems to not work, unless i am misunderstanding.
Basically, when you calculate fcf available for debt paydown, that goes through the revolver first. If the FCF available is originally negative then you draw from the revolver, your balance increases and you make sure not to exceed the max capacity of the revolver.
My question is what happens if your FCF is still negative after your max capacity draw from the revolver? In this template, the paydown available for other debts after revolver is calculated as -min(cash available for paydown, and beginning balance). Now in the case where cash available for paydown is positive, this makes sense. But when it's negative it obviously doesnt because you are borrowing more from a non-revolver debt.
Perhaps this is too much of an edge case, but has anybody encountered this situation on model tests, should i make sure to take care of it by adding some other min max function (idk exactly what)?
edit: starting to think that even fi the model doesn't account for this slight edge case, it just means that the lbo has gone bad so it's not really something that would be modeled to begin with - that is, an lbo with such bad assumptions to produce that much negative FCF. although I feel that depends on the capacity of the revolver as well.
Purely conceptually, if you've used up your revolver and your FCF is still negative and you have no cash in the bank, you'll need additional sponsor cash injection to avoid bankruptcy (otherwise you'll go into a negative cash situation).
From a modelling perspective, wrap the current min function you have in a max of that function and 0, so it will return 0 if FCF after the revolver is negative.
Haven't really seen this in modelling tests, but agree that if the business can't even pay-off the interest on debt then it shouldn't really be an LBO target in the first place.
feel like it's more of a downside scenario type thing
“My question is what happens if your FCF is still negative after your max capacity draw from the revolver?“
Then you’re fucked buddy!
hell yeah, thanks
Welcome to the wonderful land of equity cures mate
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