Hi All,
Happy New Year and thanks in advance for reading thru / helping out with my questions below on the LBO S&U line items!
I'm new to LBO modeling and sorry if my questions are too basic, but after trying out a few online LBO tests (simple ones for now), I have some confusions around the S&U line items, and I was wondering if anyone could kindly provide some help?
Min. cash
- I understand that in a CFDF deal, seller gets to keep their cash and repay their debt by themselves, i.e. sponsor won't touch any of those cash/debt, so if there's min. cash requirement, it should come from Sponsor on the Uses side - but I've seen a test example where min. cash = $5m, the sellers has exactly $5m on B/S, and yet this min. cash is NOT showing up anywhere in S&U - is this correct? Given that it's a CFDF deal, won't the sponsor need to provide this, in which case this $5m cash will show up in the Uses table? (and the $5m on seller's B/S will just stay as is, and the PF Cash will be $5-$5+$5=$5?)
- In a non-CFDF deal, do we just automatically assume the X amount of min. cash comes from seller and the rest (if there's any) will just be "Cash from B/S" going into the Sources table?
Financing fees
- Without explicit instructions, should we always assume revolver is undrawn at close?
- When calculating total financing fees, do you use the total revolver amount, or drawn-at-close amount to multiply the 2% fee, for example? I've seen both in different model practices and am not sure which one is correct / the norm?
- If revolver total amount is 3x EBITDA, and drawn amount is 2x EBITDA, do you use the drawn amount or the total amount * 2% fee?
Thank you so so much for your help!
Beg. cash balance (equivalent to the amount on the pro forma B/S at Year 0 of the transaction) would appear under the Uses section. The value of minimum cash would be subtracted alongside mandatory debt payments when calculating free cash flow available for discretionary pay down.
The revolver is assumed to be undrawn in Year 0 of the transaction. When calculating annual interest expense for the revolver (LIBOR + spread), I typically use an average balance for every given year. Undrawn commitment fees are derived as a fixed rate multiplied by revolver limit less any drawn amount.
Thanks for your quick reply!
Yes totally understanding on the FCF build and Revolver commitment fee calc part - I was actually confused on the Sources & Uses step where we put in min. cash into consideration to arrive at Sponsor equity plug.
And for the 2% financing fees part, I meant the total financing fees calc, the one that's get capitalized on B/S and amortized year over year.
How would you normally deal with min. cash then? Thanks so much!
I have always taken a different approach, assuming company A is sold at $100MM, then I’m assuming that’s the EV. Therefore, you will wipe out all cash and debt in the balance sheet.
Thanks a lot RichChigga for your reply!
Yes understood on the paying the TEV part - but wouldn't this be the case for CFDF deals only? (in non-CFDF deals, it'd be total equity purchase price going into the Uses table instead)?
Do you also agree that for CFDF deals, min. cash should indeed come from the sponsor, in which chase this $ amount will go into the Uses table? (So basically you also agree that the test example I saw was doing it wrong?)
Thanks again!
Min Cash:
1: You're spot on with your understanding of a CFDF deal. Assuming the example that you described is CFDF, $5mm in cash needs to be added to the PF year 0 balance sheet and should be reflected as a use. It would only make sense for the $5mm to not show up in the S&U if the deal was NOT CFDF (and even then, you might still show the cash as both a source (cash from pre-transaction balance sheet) and use (cash to PF balance sheet to satisfy minimum cash requirement) rather than omitting it altogether.
2: Not exactly--it's best to think of the pre-transaction balance sheet and the minimum cash amount separately. From what I've seen, the best / simplest way to think of pre-transaction BS cash and debt in a non-CFDF transaction is that it is a source if the company has net cash on their BS and a use if the company has net debt on the BS. The simplifying assumption is that the company will use whatever cash it has on hand to pay off its debt right before the transaction is consummated--whatever debt or cash is left over will then be wiped out by the new capital structure or used towards financing the rest of the new capital structure, respectively. You can then treat the min cash balance exactly the same way as you do in a CFDF transaction (i.e. as a use of cash)
Fees:
1: Yes, always unless explicitly stated otherwise. The revolver exists as a line of credit in case the company runs into a cash crunch (e.g. while financing working capital requirements), so it generally wouldn't make sense to fully draw the revolver right off the bat.
2: Capitalized financing fees are assessed on the entire revolver amount, not just what's drawn. A $100mm revolver with 2% fees would warrant a $2mm financing fee to be added to the transaction uses whether it's been drawn or not. Regarding seeing both in model practice, you may be confusing the initial financing fee (which is capitalized on the BS and amortized over the life of the loan) with an undrawn commitment fee, which charges the company interest on the revolver balance that is undrawn.
Thank you so so much hciii - It totally clears my confusions now!
And thanks for clarifying on the Capitalized financing fee part as well - looks like the model answer was wrong then, cause commitment fee aside, they were indeed using the drawn amount to calculate this capitalized financing fee, but now I get it that " $100mm revolver with 2% fees would warrant a $2mm financing fee to be added to the transaction uses whether it's been drawn or not." , so basically the fee should be calculated off of the total capacity amount.
And yes for the commitment fee, should be the amount undrawn * comm. fee % for every year.
Thanks again hciii, and I look forward to your kind help on my quick follow up question on min. cash. Thanks again!!
Happy to help. In the scenario you describe, I'd utilize the following two uses:
-"Pay off company's pre-transaction net debt" equal to the company's pre-transaction total debt less pre-transaction cash
-"Cash to BS to cover min cash balance" equal to whatever the minimum cash assumption is
Both of these items are uses of cash, which means they are financed by the sponsor as you say
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