Hi guys,
I recently had a capital structure test at a PE firm, and wanted to ask for your guidance on how to solve it. - EBITDA 100m - Multiple: 7x - Senior funding: 4y 4x EBITDA, 96 OID (LIBOR was given) - Mezzanine: 7y 2x EBITDA 12% interst (10 cash 2 PIK) + 2% fee - Base case equity return: 5y 25 IRR% - Debt bullet
Question: calculate IRR and MoM for senior funding, mezz and equity under base case. Can someone explain me on how to approach this? It wasnt a LBO modelling given that no other assumption was given (test was 20-30mn long).
Thanks!
(I) TEV — 100 x 7 = 700
(II) Sources & Uses U — 700 + 96 OID + 4 Fee Total = 800 S — 400S + 200M + 200 Equity Total = 800
(III) Debt Schedule - S Cash Interest based on LIBOR + x% No mention of Amortization
Debt Schedule - M Beg Bal = 200 , Non Cash Interest 2% = 204 End Bal, Cash Interest 10% on End or Avg Bal
(IV) Life of OID + Financing Fee — 4 yrs assumption (96/4 +4/4) = 25
Calc Returns
Looking for more experienced folks to jump in and see how they would approach this..
TripleARated Thanks for taking the time ! While the approach is getting more clearer to me, I am still struggling to understand calculating the returns (IRR and MoM) for the two debt tranche. For the equity, it is clear that it must be IRR 25% (as it is given), and an MoM of ~3x (Equity of 600), but what about the the returns for the Senior/Mezz - how do i calculate these/how would i do that?
TripleARated your Sources & Uses is not correct. "96 OID" means that the debt is issued for 96% of face value and you can think of the other 4% as an origination fee.
Total financing fees would be 16 + 4 = 20
The OID essentially reduces the cash the lenders put up up front so the initial cash outflow for them is slightly smaller, thus boosting their IRR
You have your outflows / principal for both the senior debt and Mezz, you have your inflows which are interest payments, we have bullet repayment at the end of tenors (for both instruments).
I would calculate my IRR based on the above.....
Don't forget that the PIK gets capitalised every time you calculate your interest.
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