How to model mezzanine debt in paper lbo

Hi,

How would we model mezzanine debt in a paper LBO? Would it dilute equity at exit because it would be converted to equity? If so, does it make sense that it both has an interest rate and is converted to equity at exit?

Thank you for your help!!

 

Depends on if it's convertible or not. 

If it's not convertible or it does not convert, then you basically model its IRR as with any piece of debt. Just flow the CF each year + repayment and apply an XIRR function to pull IRR.

If it is convertible and it does reach strike, then you still model the CF up until the conversion point, then convert, and at end of holding period, model as you'd sell the equity holding (assuming dilution as well). At the end of the day, this is still just a series of cash flows by time period, so use XIRR again.

 

Sunt quas est quia unde et sunt impedit. Quibusdam nostrum odit architecto cumque mollitia asperiores. Odio illo neque sequi iusto. Accusantium omnis eos aut sit similique nisi mollitia.

Placeat et et ratione dolore dolorem. Est molestias occaecati quas totam. Adipisci qui saepe corrupti sunt. Sed numquam blanditiis rerum iure.

Career Advancement Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 99.0%
  • Warburg Pincus 98.4%
  • KKR (Kohlberg Kravis Roberts) 97.9%
  • Bain Capital 97.4%

Overall Employee Satisfaction

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Blackstone Group 98.9%
  • KKR (Kohlberg Kravis Roberts) 98.4%
  • Ardian 97.9%
  • Bain Capital 97.4%

Professional Growth Opportunities

April 2024 Private Equity

  • The Riverside Company 99.5%
  • Bain Capital 99.0%
  • Blackstone Group 98.4%
  • Warburg Pincus 97.9%
  • Starwood Capital Group 97.4%

Total Avg Compensation

April 2024 Private Equity

  • Principal (9) $653
  • Director/MD (22) $569
  • Vice President (92) $362
  • 3rd+ Year Associate (91) $281
  • 2nd Year Associate (206) $266
  • 1st Year Associate (387) $229
  • 3rd+ Year Analyst (29) $154
  • 2nd Year Analyst (83) $134
  • 1st Year Analyst (246) $122
  • Intern/Summer Associate (32) $82
  • Intern/Summer Analyst (314) $59
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
BankonBanking's picture
BankonBanking
99.0
3
Betsy Massar's picture
Betsy Massar
99.0
4
Secyh62's picture
Secyh62
99.0
5
CompBanker's picture
CompBanker
98.9
6
kanon's picture
kanon
98.9
7
dosk17's picture
dosk17
98.9
8
GameTheory's picture
GameTheory
98.9
9
numi's picture
numi
98.8
10
Jamoldo's picture
Jamoldo
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”