LBO Modelling Test - Doubts

Had a modelling test for an interview recently which had a Term loan and Revolver for an LBO. I have not modelled with RCFs before, so I have a few questions.

So the RCF is a 400 MM facility, with 4% interest and 1.5% maintenance fee. My questions are.

  1. When to draw the RCF? I would suppose when in any particular year, the (cash flow - debt service) becomes negative, that is when I payback right?

  2. In that case when to repay the RCF? In the subsequent years when there is excess cash? 

  3. About the interest rate of 4%, it only applies on the drawn down amount right?

  4. About the maintenance fee of 1.5%, I assumed it applies on the entire 400 MM, but on second thought, I am not sure now. Does it only apply on the undrawn part?

One more question I had with the Term Loan part: It said repayment on excess cash sweep. Does it mean that any additional cash flow should be taken for the repayment? Or a part of it? How does it work in reality?

Thanks a ton for the help :)

Kind of absolutely battered after I bombed the interview today but need to buckle up and learn fast as I have a couple more lined up. I am pretty good with the paper lbo case that you are asked in the interview, but this was a first of a kind experience for me. Any tips on how to prepare for this in a time efficient way would be very much appreciated :)

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Comments (2)

  • Associate 1 in PE - LBOs
Jun 9, 2021 - 7:59am

1. You draw it when your (Beginning Cash + FCF - Mandatory Debt Repayments) < 0 or your minimum cash amount. Think of it as a credit card you'd use to never have your cash balance dip below zero or whatever your minimum cash amount is. For example, in your personal bank account if you told yourself "I never want to dip below $100 of cash in my account," then you could advance cash from your credit card to your bank account to ensure you meet your criteria. Same principle. 

2. It is the most senior debt tranche, so the goal is to pay it off with any excess cash immediately. 

3. Correct. If it's an annual model, the calculation should be =average(beginning balance, ending balance) * interest rate of 4%.

4. Maintenance/stand-by fee applies to the undrawn portion of the revolver. So if you had a $400M revolver capacity, but already drew $100M, then the maintenance fee would apply to $300M of the undrawn amount. Think of it as the fee the bank charges you to make that commitment to you that the cash will always be there for when you need it. 

5. Cash sweep means any excess cash flow would be used to pay down any amount owing on that debt tranche. 

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