Hi there, I am preparing for a LBO modelling test, i've seen assumptions for the mezzanine debt given as "20m with 12% intrest and +2% warrants". Throughout the investment period, do these warrants affect the modelling at all (3 statements)? does it appear in the debt schedrule? or are they off BS items? or is it at exit, when I am computing the sponsor equity that I need to remove the 2% of EqV, as In EgV to sponsor and managment =100%-2%, then assuming management equity of 3%, EqV of Sponsor will be 98%95%EqV at exit? Grateful for any help!

Good question. We deal with warrants a fair amount in my models. For our modeling, the warrants are executed (if in the money) the year after remaining principal of the note gets paid off or in a change of control transaction, whichever comes first. It depends on your assumptions, but we assume that no stock is actually issued to the warrant holder and the holder is simply paid 2% of equity value at the time of exercise (reduction to cash and retained earnings).

Warrants in LBO modelling

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Warrants in LBO modelling

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