Does anyone know the answer to this?
Your EBITDA drops to $50 in year two. At entry, you have three turns of first lien debt (@ 5% interest) and two turns of second lien debt (@ 10% interest). Your second lien debt is trading at 80. What information would you need in order to determine whether or not we should invest in the second lien tranche of debt?
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This seems like more of an RX/DD question. Would need to know Y1 EBITDA to determine initial cap structure, and then a multiple of EBITDA to value the company at. From there you could calculate the company's current EV, subtract out the value of the 1L, and then whatever you have left over divide by the 2L. If it's over 0.8, invest
We need to know Entry EBITDA, Year 2 EV/EBITDA multiple, and Year 2 cash - lets call them E, M and C respectively. One way to approach this is as a basic waterfall question (ignoring interest and time horizon completely). Total distributable value in Year 2 is 50*M + C. Value available for 2L is 50*M + C - 3*E, so 2L coverage is (50*M + C - 3*E) / 2*E - buy if it's above 80%.
If we want to calculate actual YTM and yield per turn of leverage then we need to know the tenor of the 2L debt, but my guess is the question is mostly looking to test if you know the basics of a waterfall.
Nice
What guides do you recommend to study questions like this?
Thanks, super helpful! We do we add Cash (wouldn't the EV/EBITDA * 50 already account for Cash balance?)
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