Hi all,
If you received a CIM with no assumptions (leverage, interest, price, etc.), how would one go about coming up with your own reasonable assumptions for an LBO?
Never had to create my own assumptions before (especially on various tranches of debt), so any help here would be much appreciated from the experts.
Others may have a better answer here, but it is easiest if you have friends that works in BBs, especially in LF or Sponsors groups. Explain the situation to the best of your abilities, citing facts such as revenue growth, margin, major cash flow items, seasonality, etc. At my BB, we typically just call LF. Over time, you can build a barometer to take an educated guess on leverage, tranches, pricing, etc. Given that you are in consulting, I would suggest the route below instead.
Alternatively, you can get a S&P LCD subscription. The U.S. news version of the service is ~$7-10 per month and your company may pay for it. May be tough given that you are not in banking, though (still get it if they say no). This source has incredibly helpful information on LBOs in the market, or ones that have been syndicated previously. Typical information given is leverage, OID, credit rating, interest rates (L+xxx on term loans or x.xx% coupon on bonds), price talk, etc. Use this info from similar LBOs to benchmark the target company and take an educated guess on leverage, tranches, pricing, etc. Going down this route would be better when presenting assumptions to superiors in PE as you have data to back up assumptions.
Once you get to PE, if you are at an UMM or MF shop, you will have some sort of a capital markets group that can help with these assumptions. At smaller shops, it is more of a negotiation with direct lenders or banks, depending on the size of the transaction.
good idea w/ LCD - I checked and you can’t get a paid retail login immediately. u gotta speak to someone and go from there. and that cost seems low I thought like $250 I heard a month.
S&P itself is extremely expensive, but the U.S. News Service option is low cost. It does not allow you to do large data pulls or gain access to insights, but it gives access to all LBO news, including tranches, for the amount mentioned above.
agree w/ guy above. for now if you can't get that info just put this for a quick and dirty: Corp Rating (CFR): B/B2 Revolver & 1st lien TLB: L+400, 99.0 OID, 1.00% LIBOR floor (2.00% Underwriting Fee) Second Lien TLB: L+800, 98.5, 1.00% LIBOR floor (2.50% Underwriting Fee) 1L/2L are usually 400 bps apart (so also L+375 / L+775) Obviously give the caveat that this a basic example in a normal market (not a dislocated market), and obviously depends on __, __, __.
also if I were you, I would send me that CIM and whatever the ask is and what you’re putting down and sending to them- I can see if it doesn’t makes sense right away (and so will they)
and for revolvers commitment fee put 37.5 bps or 50.0 bps. either will be fine but don’t go lower or higher
just know you can still screw this up if you don’t give us more info - so we give insight to - like don’t structure 50/50 as a $250 1L TLB and $250 2L TLB - that will catch their eye immediately, among other considerations what’s the leverage, EBITDA, purchase price & multile, and what industry. also what other assumptions are missing. if u want to just DM me I can just send u back materials to filter for comps, so u hit it out of the park, and other docs to help in various ways. al
For a case study:
1.) Would you make separate underwriting fees for the different tranches or just simple e.g. 2% financing fee?
2.) For the revolver, isnt the commiment fee for the capacity 30% of the spread? so e.g. 30% of 0.5%? Thats what I learned
3.) Is the Revolver always priced same to TLB?
4.) How is TLA priced? I know TLA is not really common anymore but still
Thanks!
are you from Europe? 30% is Euro style execution.
1) UW Fee - no - see my summary above. break it out. I can no longer see the RC/TLB pricing question but keep it the same at closing, but RC maybe w more step downs based on Lev. if you want to have it 25 bps inside TLB, OK. not uncommon.
2) RC -no. see my summery above - 37.5 or 50.0 bps - step downs are conmjb
3) RC / 1L TLB pricing
4) TLA - who said it doesn't exist? depends on rating so I'd need a specific example but banks are buyers so pricing is lower.
Yes, Europe. Thanks for your answers, so:
1.) I should break out the different fees; multiply them times the tranche amount and sum up to get total financing fee?
2.) So in Europe you do 30% times spread, in US 37.5/ 50 bps, correct?
3.) Understood, so RCF same spread as TLB
4.) Yes absolutely correct. In Europe you see less and less TLAs
One of the most helpful users I've seen on here yet. Thank you!
I appreciate the kind words and recognition!!! I'm just getting started. glad to know also in a hyper-IBD focused that providing insight like this is of value. I'll keep it up
what is the end goal / final format of the case study? feel free to DM and u can send me directly and I can take a look. what’s this for, an LBO financing? refinancing? a lot of these answers depend on more information.
in other words, is there an accompanying PowerPoint as a Request for Proposal / Term Sheet? S&U and PF Cap? if so, my response to the pricing will require more detail. idk how these case studies are formatted. so “help me help you”
In a case study, no one is going to be expecting you to size and price a capital structure perfectly. However, agree with some of the commentary above that you want to set it up in a way that is reasonable, otherwise you'll raise a red flag.
The simple answer - the majority of LBOs in a pre-Covid market get done with 35-40% equity, 60-65% debt. Ignore software deals and high growth consumer - people pay 8-11x for most LBOs. Therefore, reasonable leverage assumptions range from 4.5x- 6.5x. Size your leverage based on what you think the value of the business is when you read the CIM.
Splitting tranches - if you aren't forced to provide two tranches of debt, most MM deals at 4.5 or 5.0x leverage are unitranches, blended pricing at L+5.5-6.5. If you are forced to provide two tranches, assume 1.0x-1.5x of junior and plug the rest as senior.
Senior debt at L+375-500, Junior at L+650-900. Pick where you want to be in the range depending on how you feel about the business - if you are saying it carries an 11x valuation, would price the debt tighter, lower value, more expensive debt.
Really appreciate the insights here! Curious to know if assumptions such as transaction fees or financing fees are not provided, are there standard assumptions you could use? For example, I heard financing fees ~2-2.5% of debt, but not sure how to assume transaction fees
2% financing fee (apply to term debt and entire revolver amount, even though undrawn at close), 99 OID. 98 OID on junior debt if you want to be fancy. $1M entry transaction fees, Min of 2% TEV and $20M at exit. The reason entry and exit transaction fees is so different is most sponsors don't use buyside advisors, but will use bankers to run auctions on the sellside.
I got you here and with added specifics
structure RC / L+400 1L TLB / L +400 99.0 OID 1.00% floor 2L TLB / L+800 98.5 1.00% floor
+400 btw 1L/2L so L+375/775, 500/900
sizing - maximize 1L, throw rest into 2L. you won’t see 3x/6x, or 3x/5x as much, as 2L is generally smaller, for example - I did a couple deals like 1L $150, 2L $35. but I wouldn’t see 2L 1/2 the size of 1L like $150 / $75. somore like
up to 4.0-4.5x - all 1L 4.5x/4.5x
>4.5x - 1L/2L 4.5x/6.0x 5.0x/7.0x (software)
fees RC/1L - 2.00% to 2.25% 2L - 2.50%-2.75%, even 3% (+0.5% from 1L to 2L)
flex - depends but in normal market 1L - 125 bps flex (50 OID) 2L - 150 bps flex (62.5 OID) (+25 bps / 12.5-25 OID 1L to 2L)
what else am I missing? feel free to DM for any follow up and we can email and such
and if it’s a best efforts deal - 1.00% fee. no flex
Molestiae illum quos numquam esse. Occaecati dolorum est cupiditate sit. Cum laboriosam aliquam ea amet et veniam ullam.
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...
Qui et ut culpa eum mollitia. Velit autem quidem at natus cupiditate omnis aut. Quibusdam et officia debitis dolor quia alias.
Saepe quis suscipit facere dolorem sed et. Iure magni aut qui exercitationem. Et corporis aut debitis aperiam. Veritatis soluta voluptatibus non eligendi sed.
Corrupti rem nulla animi quidem ullam et. Repudiandae et maxime non provident ut ipsa. Eum corrupti rerum sunt blanditiis. Repellendus sed modi eveniet occaecati nisi quod.
Ut vero nihil dolore. Repellat incidunt at voluptas est eaque sed similique. Quas veniam ea nihil iste. Officiis quam minima eos minima. Nesciunt eum iure ea consequatur.