Hi Everyone,
I've got a few PE interviews coming up and expecting typical LBO Tests/Case Studies to be coming up. As I'm prepping for these, I'm wondering what sort of debt terms would be reasonable to assume for these if none are provided. Obviously in the real world terms would very much depend on deal type, industry, leverage, etc., but in a plain vanilla LBO Test for some consumer, industrial or software asset, would interviewers expect multiple tranches of debt with different terms, repayments, PIK, etc.? Or could I - for simplicity, given the test environment - reasonably assume something like the following:
- 6.0x TLA, 8% interest (since I likely won't have LIBOR figures, wouldn't use a spread), 5% amortization plus cash sweep
- 0.5x Revolver (undrawn), at 5% interest with 0.5% undrawn fee
Additionally assuming 3% fees on total financing amount.
Thanks in advance!
Ah, gearing up for the PE interview marathon, are we? Let's dive into the jungle of LBO tests and see what kind of debt terms might help you swing through those case studies like a pro.
When it comes to LBO tests, especially in PE interviews, you're right to think that the real world is a vast, varied jungle with all sorts of creatures (or, in this case, deal types, industries, and leverage scenarios). However, in the controlled environment of an interview, things tend to be a bit more... let's say, standardized.
Your approach to simplifying the debt structure is not only reasonable but also quite savvy for a test environment. Let's break down your assumptions and see how they align with the wisdom found in the Wall Street Oasis (WSO) forums:
6.0x Term Loan A (TLA), 8% interest, 5% amortization plus cash sweep: This is a solid assumption for a senior secured term loan. It's within the ballpark of what's considered reasonable for LBO financing. The interest rate you've chosen is a bit on the higher side, which could be seen as conservative but realistic, especially if you're not using LIBOR or another reference rate. The 5% amortization is also a prudent choice, showing that you're thinking about the debt repayment schedule. The cash sweep mechanism is a nice touch, indicating that excess cash flow will be used to pay down debt faster, which is something lenders love.
0.5x Revolver (undrawn), at 5% interest with 0.5% undrawn fee: This is a smart way to include a revolving credit facility (RCF) in your capital structure. The undrawn nature of the revolver at the outset is typical, as it's often used for working capital needs or as a liquidity buffer. The interest rate and undrawn fee you've assumed are reasonable and show that you understand the slightly lower cost of revolvers compared to term loans, due to their secured, short-term nature.
Additionally assuming 3% fees on total financing amount: Including financing fees is an important detail that candidates often overlook. It shows you're considering the total cost of securing the debt, not just the interest expense. A 3% fee is within the realm of possibility, though it might be on the higher end depending on the specifics of the deal and the lenders involved.
In summary, your assumptions are quite reasonable for an LBO test in a PE interview setting. They demonstrate a good understanding of LBO financing structures and the costs associated with them. Just remember, the key in these interviews is not just the numbers themselves, but your ability to justify them based on the scenario at hand. So, be prepared to explain why you chose these terms and how they fit into the overall investment thesis of the LBO.
Good luck with your interviews! Remember, in the jungle of PE, being prepared is half the battle.
Sources: Debt for LBO?, Creating own LBO assumptions, Private Credit Resources and Prep, How to think about Debt for Acquisitions
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