Interview Question - Walk me through adding debt with an equity kicker

Wilson1823's picture
Rank: Orangutan | 318

Hey - question for you folks who are grinding on interviews or who are more familiar with the accounting behind mezz debt. If an interviewer were to do a riff on the "walk me through the effects of doing XYZ" by asking to show the impact at time 0, and then after 1 year, adding say $100mm of debt with a $50mm equity kicker (I'm assuming structured as warrants?), how would you go about that?

My initial thought is to put $100mm in liabilities as debt, and $100mm in cash to balance. But how does the warrant kicker fit into the accounting?

After 1 year you would have interest expense and handle that as normal (or if it's PIK then treat as a non-cash expense, get the tax shield, and add back in operating expenses etc). Again, how do the warrant kickers figure into this?

Any help with how to handle this would be much appreciate. I know with converts it can get funky with listed debt value on the balance sheet actually accreting up to par value over the life of the security, with the accreting amount counted as a non-cash interest expense. Does a debt security with a warrant kicker have a similar treatment?

Comments (3)

Mar 27, 2017

Bump.

Mar 27, 2017

The only context I have seen equity kickers in is LBO scenarios where the debt investors need additional convincing. In this case the kickers didn't come into play until exit. I could be completely wrong, but in my experience they function similar to convertibles, with no different impacts compared to debt, until they are paid off or until exit.

Mar 28, 2017
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