Anyone ever experience a model test with negative levered FCF after mandatory payment? I couldn’t do the revolver adjustment because I didn’t have time, but it certainly feels wrong…
Just want to know if this is a thing
| +45 | Future of PE | 8 | 4h |
| +25 | Hardest time I have ever seen to be a GP | 3 | 3d |
| +20 | How to Get on Career Track / Stay Post ASO years | 6 | 1d |
| +19 | Weighing exit from LMM PC/PE | 4 | 1d |
| +18 | Healthcare PE | 7 | 11h |
| +15 | KKR comp for Principal | 20 | 10h |
| +11 | Reality of the move from LMM to MM | 2 | 6d |
| +9 | LMM/MM PE London | 5 | 2d |
| +9 | PE Behaviorals Feedback | 1 | 6d |
| +9 | MBA and Private Equity | 3 | 2d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Negative levered free cash flow (FCF) after mandatory debt payments can indeed occur, and it’s not necessarily "wrong." Based on the most helpful WSO content, levered FCF represents the cash flow available to equity holders after accounting for all operating expenses, taxes, capital expenditures, and mandatory debt payments. If mandatory debt payments exceed the cash flow generated, the levered FCF will turn negative.
This situation can arise in scenarios such as: 1. High Debt Obligations: If a company has significant mandatory debt payments, it can push levered FCF into negative territory, even if the company is profitable from an unlevered FCF perspective. 2. Insufficient Operating Cash Flow: A company might generate enough cash flow to cover operating expenses and capex but fall short when mandatory debt payments are factored in. 3. Temporary Cash Flow Issues: Seasonal businesses or companies undergoing a downturn might experience negative levered FCF temporarily.
In such cases, a revolver adjustment or other financing mechanisms (e.g., drawing on credit lines) would typically be used to cover the shortfall. However, if you didn’t have time to model the revolver adjustment, the negative levered FCF might feel incomplete but is still a valid outcome based on the inputs provided.
This scenario also highlights the importance of understanding the implications of negative levered FCF, as it could signal potential risks for equity investors, especially in the event of financial distress or bankruptcy.
Sources: Levered vs. Unlevered Free Cash Flow Difference, Walk me through a DCF, FCFF vs Unlevered FCF - is there a difference?, https://www.wallstreetoasis.com/forum/real-estate/megafund-repe-modeling-test?customgpt=1, Corp Dev LBO returns question: Levered and Unlevered IRR
Explicabo qui consectetur explicabo non adipisci cupiditate in. Voluptatem consequuntur porro et consequuntur sed. Voluptas et temporibus temporibus quae illo.
Ipsam tempora est eos. Possimus quaerat explicabo ea ab.
Voluptates illum mollitia dolore eos dolor ut. Distinctio asperiores cum maxime sed. Vel numquam cupiditate veritatis adipisci iure aut facere quisquam. Consequatur est quia fuga quis repellat rerum aut. Velit facere earum magnam omnis commodi modi delectus. Placeat ullam nihil harum ut hic.
Dolorem aut consequuntur exercitationem beatae aperiam aut unde. Consequatur aliquam nihil aliquam tempora.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...