Vault PE Guide Technical Question Explanation
Can someone please provide further color/explanation of the answer they provide to this question?
You have a company with 3x senior leverage and 5x junior leverage. What happens when you sell the business for 9x EBITDA? What about for 8x EBITDA?
i. It’s a de-leveraging transaction because pro-forma the company will have lower total debt to EBITDA ratio
ii. On a firm basis, it has a neutral impact, but it is de-leveraging on a senior debt basis
That question doesn't really make sense. If you sell the business?? Are you sure you're reading that correctly?
Question seems off to me.
If you sell at 9x, you get equity proceeds back. At 8x, you are paying back existing debt, meaning you are breaking even.
I assume they say it is a de-leveraging transaction because the New Co. will likely only have 70% debt when acquired by a financial sponsor, meaning your total leverage has decreased. The second roman numeral doesn't make sense to me as you cannot assume that the sponsor isn't able to recap the New Co. at a higher level of senior debt or an alternative blended structure.
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