LBO modeling Q's

prophets's picture
Rank: Chimp | 8

I'm being asked to do an LBO/private equity model scenario. I'm a pretty good modeler/equity research person, but some terms are not familiar to me.

1. What is Base (as in Base + %)? I see LIBOR + % (I can look up 1 year LIBOR obviously), but what is base %? Is this supposed to be given to me by the financing institution/bank ?

2. There are separate financing facilities like M&E, Capex Facility, Revolver (A/R). I'm supposed to just model each borrowing base against the asset, I guess. Any tricks or points on this matter? Doesn't seem that complicated.

3. If you do private equity/lbo analysis, how often do you use regression analysis in forecasting the income statement?

thx

pro

Comments (13)

Mar 26, 2013

I'll answer in reverse order because I'm awesome like that. Also keep in mind that I'm not yet in the industry, but I have taken a lot of courses on modeling. Hopefully someone else can come by and give a thumbs up or thumbs down to my comments.

3. I only have experience with viability models, and with that the point is quick & dirty so no regression analysis. Hopefully someone can fill you in on more advanced modeling.

2. Don't forget to turn on circular references? I could send you a basic model I just finished for an M&A project if you'd like. Note: theoretical... not actually used for anything but classes, so take that as you will.

1. The way I was taught, base is the base % of sales growth, SG&A growth, and gross margin growth (excluding d&a . So we'd have 3 cases: base, weak, strong. For base there's a few ways we would try to project it: Either the average (from historical data) for base, strait line of lowest growth for weak & strait line of highest growth for strong; or possible using the median growth % from historicals.

Hopefully this will help
--Patrick

Mar 26, 2013
smpat04:

1. The way I was taught, base is the base % of sales growth, SG&A growth, and gross margin growth (excluding d&a . So we'd have 3 cases: base, weak, strong. For base there's a few ways we would try to project it: Either the average (from historical data) for base, strait line of lowest growth for weak & strait line of highest growth for strong; or possible using the median growth % from historicals.

Correct me if I'm wrong but the base you stated is the base earning projected growth rate and the base in terms of interestest rate. Typically a Term loan is priced at Base + LIBOR. The base is the interest rate the bank charges to facilitate the credit facility. It is normally calculated based on the credit rating of the firm. It is normally given to you when you perform an credit risk.

Mar 26, 2013

It's basically another way of saying LIBOR or Prime Rate - maybe with a slight increase to the actual %.
Open up a public company's credit agreement and search for "base rate"

This is from Facebook's credit agreement:

"Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% and (c) the sum of (i) the Adjusted Eurodollar Rate that would be applicable to a Eurodollar Rate Loan with an Interest Period of one month commencing on such day and (ii) the excess of the Applicable Margin with respect to Eurodollar Rate Loans over the Applicable Margin with respect to Base Rate Loans. Any change in the Base Rate due to a change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted Eurodollar Rate shall be effective on the effective day of such change in the Prime Rate, the Federal Funds Effective Rate or the Adjusted Eurodollar Rate, as the case may be.

Mar 26, 2013

UP, you are probably right. I just noticed he was talking about LIBOR above. I am curious though-- if this were a feasibility analysis why would we not just get market rates as that's what we're likely to pay for the credit facility then distribute excess returns as equity at deal close? I always 'solved' for mezzanine financing with tranches a b c of debt running ... at market + %. Ok screw you guys you win =P

Thanks for the correction UP!

--Patrick

Mar 26, 2013

OP, have you ever looked at an LBO model? If not, check out macabacus.com/valuation/lbo/overview.

If you are solid with modeling, you should be able to follow along and figure out how the various debt tranches impact capital structure.

Mar 27, 2013

Thx for the datapoint on base rate %. I figured it ought to be given to me.

Everything else seems straight forward. Thx guys.

Mar 27, 2013

I would recomend that you ask your supervisors. For our firm Base rate is defined as the highest of the Federal Funds rate plus 1/2 of 1% or the Daily LIBOR for a month period plus the difference between Interest Margin for LIBOR Rate Loans and Interest margin for Base Rate loans.

Mar 29, 2013

Thanks for that detail.

I was given a financing document in a larger deal package from my client. The financing terms had 3 different options (based on larger amounts of borrowing). The document describes a "Base + %" so the bank must know. I can just stick in fed funds + 0.50% for now, I guess. It's a back of the envelope model at this point.

Thx

Mar 27, 2013

Term loans are based off of Libor plus applicable margin, which is set based on leverage ratios, ratings, or whatever is detailed in the credit agreement.

Apr 20, 2013
DaisukiDaYo:

Term loans are based off of Libor plus applicable margin, which is set based on leverage ratios, ratings, or whatever is detailed in the credit agreement.

Just to give this more color in case you need it - I haven't seen what many describe this as, which is a "LIBOR FLOOR". Generally unique to the specific credit exposure.

Apr 20, 2013
LevFun:
DaisukiDaYo:

Term loans are based off of Libor plus applicable margin, which is set based on leverage ratios, ratings, or whatever is detailed in the credit agreement.

Just to give this more color in case you need it - I haven't seen what many describe this as, which is a "LIBOR FLOOR". Generally unique to the specific credit exposure.

???

A LIBOR floor just means the minimum base rate that the borrower has to pay, regardless of what LIBOR actually is. For example, if you have to pay L+150 with a 2% floor, if LIBOR is 0.50%, you actually pay 3.50%, not 2%.

Apr 24, 2013
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