Modeling test

Have a modeling test coming up. It will be a DCF within 1 hour. Can anyone please share some examples/case studies for me to practice?

I wonder if waterfall will be included in the test as well?

Thanks!

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Dec 21, 2016 - 11:49am

Modeling Test Questions (Originally Posted: 03/19/2011)

Guys - need your help here. I have a final round on Monday which consists of a case study and among other things, a 1 hr modeling test. Headhunter said it would consist of building a 3 statement model. I am a fig banker who has limited experience with lbo's. That said, I can build a quick and dirty interview style one but still have some outstanding questions that I hope you guys can help me with so that the modeling portion goes as smooth as possible.

Questions:
- Purchase accounting adjustments: Do I need them? In my limited experience building lbo's, you need them to produce a legit balance sheet - however, building this out adds significant time. Recommendations?

  • Don't know debt markets that well, so what interest rate assumptions should I use for revolver, senior, mez (pik),etc.?

  • Working Cap - does it pay to build out AR / AP days, etc., or just just make current assets / current liab %'s of sales and COGS?

  • Cash: Use it as a source? Build a cash floor requirement?

  • FDSO schedule: anyway I'm asked to break this out?

  • What are the current debt thresholds these days? i.e., am I being unrealistic by assuming debt greater than 60% of transaction value? How would you break out debt schedule into senior/mez? I usually assume 50% senior, 10% mez, 40% equity.

  • What are some questions I am guaranteed to be asked during the modeling review session? After the 1 hr test, there is a 30min model briefing session where the associates ask questions about the mechanics and rationale behind the model

  • 1 hr model test. That's pretty short. Anyone who has completed one of these, what were the expectations of your interviewer regarding complexity/robustness?

  • Tip/tricks. Anything I can do to my model/assumptions to really separate me as a candidate? Always low-ball management expectations, certain types of sensitivity outputs...anything that might set me apart

Really appreciate any help you guys can provide. Thanks a lot

Dec 21, 2016 - 11:50am

Never done a modeling case study for an interview but think I can help out on a couple of the debt-related questions.

  • revolver is typically unfunded at close; L350-550 (often same as TLA) with 50-75 bps undrawn "ticking" fee

  • senior debt, dependent on industry/current environment: can be 3-4x EBITDA: TLAs and Bs: 225-1000, with TLBs usually on the higher end and 1-3 years longer in tenor

  • bonds in the 7-11% area (coupon), with toggle adding 50-300 bps; 2-3x EBITDA

  • total leverage in the 4-7x range

  • equity 25-50% for total purchase multiple ~8-10x

Dec 21, 2016 - 11:51am

Dude, if you only have an hour keep it simple! Just have a big slug of TLB that amorts at 1% per annum and then have excess cash pay down that debt. Avg. equity contribution is around 30-40%. I would price at L+450, 99 OID, LIBOR Floor 1.25%

Dec 21, 2016 - 11:52am

Bells & whistles in a modelling test (Originally Posted: 03/13/2015)

Hey guys -

I've got a modelling test coming up and I'm just looking for some thoughts on any 'extras' I should definitely include in my model.

It's for a restructuring advisory here in NYC, so I'm expecting some type of LBO/refinance model.

What would you guys include given the time pressure (and my average modelling experience) ?

Was thinking something like:
Sources and uses
Income statement (% revenue projections)
Couple of lines for CF items (no individual schedules)
Debt sweep
Shareholders equity
Credit and Leverage stats

This was pretty much all I was thinking. Was just going to do interest off of beginning debt balance to leave out any circularity.

thoughts/criticisms/flamings welcome

Dec 21, 2016 - 11:53am

Sensitivity Tables I think are pretty good. Shows how sensitive the models outputs are to changes in certain inputs.

Array
Dec 21, 2016 - 11:54am

You probably need a debt schedule w a revolver. How long are you given? I got to the point where I could build a full 3 statement LBO with flexible debt schedule in 30m.

Use named cells to help you. Take your time and build a sollid robust template and then practice over and over again. I built a template and then sat down and built literally 10 in a row of random companies.

Dec 21, 2016 - 11:55am

yep plan to build an rcf and a couple of tranches.

timeframe should be 2-3hrs.

30mins just seems insanely fast to me - you don't happen to have the template you were using handy do you?

Dec 21, 2016 - 11:57am

I look forward to it.

First attempts taken me 6 hrs!

want to tweak a few things, removing and adding stuff. hoping can get it closer to 3 on 2nd attempt.

any point in adding an average interest or different revenue assumptions, or is this too much ?

Dec 21, 2016 - 11:58am

6hrs!!!!!! You used excel before?

"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
Dec 21, 2016 - 12:03pm

Are modelling tests prevalent for restructuring groups in North America? I know that Europeans commonly need to go through testing centres, but I have yet to encounter a North American bank asking to do testing. However, I have been hearing about some RX groups asking for it. If I am not mistaken, HLHZ RX asks for a test.

Dec 21, 2016 - 12:04pm

Sharp2ndF:

Are modelling tests prevalent for restructuring groups in North America? I know that Europeans commonly need to go through testing centres, but I have yet to encounter a North American bank asking to do testing. However, I have been hearing about some RX groups asking for it. If I am not mistaken, HLHZ RX asks for a test.


You're confusing psychometric testing and modelling tests with regard to common tests in Eur.
"After you work on Wall Street it’s a choice, would you rather work at McDonalds or on the sell-side? I would choose McDonalds over the sell-side.” - David Tepper
Dec 21, 2016 - 12:06pm

Modeling test - Interviewing with some PE firms (Originally Posted: 04/11/2008)

Hi,

I have been interviewing with some PE firms and they require me to do a modeling test..

Please could someone tell me what I need to do? What can be expected...

Is it difficult, until now i have onlybeen involved in pitches, no modeling at all... how can I make sure I pass these tests?

Anyone some tips regarding material?

Thank you

Dec 21, 2016 - 12:07pm

The test will most likely require that you build a model from scratch given an income statement and balance sheet. Assuming you can do this, you should be fine.

Aside from the three financial statements, the only additional worksheet likely required for a test model would be a summary page showing returns, entrance and exit multiple assumptions, capital structure assumptions, sensitivities, etc.

Dec 21, 2016 - 12:10pm

What about the training materials you used when you started? Wouldn't be a bad idea to look at the DealMaven or Trainng the Street examples and just practice building those models from scratch. These models are going to be more complex than what you'll have time for during a modeling test, but I think that the basic framework and set-up of these models is good and once you learn how things link up to one another, you can just simplify the model as needed until you can get down to something that you could replicate in 2-3 hours (assuming they ask you to build a model on the spot).

​* http://www.linkedin.com/in/numicareerconsulting
Best Response
Dec 21, 2016 - 12:11pm

Some general guidelines that might make things easier (some of these are my opinions so take what you will from them).

Keep the model to one sheet. Stylistically this may not be your preference but I think in an effort to conserve time it's easier not to be tabbing between sheets to link up your statements. From there if I were "grading" your model, I'd probably want to see the following (probably in this order, top to bottom):

  • Sources and Uses / Leverage Multiples / Summary Returns Analysis with implied exit equity calc, IRR and ROI (side by side)
  • Summary P&L (keep this simple, EBITDA is the driver here so don't waste your time with unimportant line items above the line - but do take it to net income for obvious reasons)
  • Working Capital (don't waste time trying to balance your B/S, just project out your working cap cash needs)
  • Operating cash flow / debt by traunch and subsequent paydown / interest calc (keep it simple for now but use average interest) / resulting EOY cash balance (at minimum sweep the excess cash for the Term)
  • Detailed credit stats by year
  • Detailed IRR and ROI Returns analysis (if the computer you're working on has XIRR add-in for excel, use it) and sensitivities

If you finish all this and still have significant time, go back and add in:

  • Lookup tables for operating case scenerios
  • Lookup tables for leverage scenerios
  • PIK capabilities for Sub/Mezz debt
  • Management options and subsequent ownership analysis (your ownership percentage will be diluted as mgmt options become in-the-money, remember this will effect your IRR/ROI)
  • Prepayment premium for retiring/calling bonds or sub in exit year

I think if you're able to do all this in two hours and make it look clean and presentable, you're in decent shape. Any other comments, feel free.

I had this all typed out and when I pressed submit, I got an error page for WSO.com, so I just wanted to let you know I retyped it for you. The things I do for your learning, young ones...

Dec 21, 2016 - 12:16pm

do u have practice material?
i cant do this...I might be able to do a simple balancing exercise balancing the balance sheet +P&L+cfs
i haven;t touched any of those in the past 10 months......
please help

Dec 21, 2016 - 12:18pm

No, unfortunately graduate24, if what you're looking for is step by step instructions or an example of a working model, I don't have anything that I could send to you (without violating any propriatary work rules).

If I may be brutally honest, if you can't translate into excel the words above, you'll be hard pressed to be proficient come model testing time. In order to do a quick model correctly and effeciently, you need to have at least SOME prior experience in modeling in excel. If I was interviewing you and knew you had very little modeling experience, a good result on the modeling test might give me comfort (but I'd be hard pressed to choose you over a candidate with both).

My advice is to find an friend in your analyst class who has great modeling skills and get up to speed, ASAP.

Dec 21, 2016 - 12:19pm

I really need to get this job.. I passed the numerical and verbal test already with top tier results, also already done 9 interviews with full blown guess estimates, brainteasers, complex math questions, detailed finance valuation/lbo theory etc and they like me...

I really need to pass this test... :(

Please can you elaborate what typically these kind of large pe shops test in the model test, I mean what kind of exercises are these? Is it always a lbo model ?

Dec 21, 2016 - 12:20pm

If you were coming from a consulting background, I'd say you can take solace in the fact that they'll understand your lack of modeling skills so the interview should be framed accordingly. However, if they're assuming you come from a background that provides this skill set, then you shouldn't expect any slack on the modeling front.

That being said, if you can build out the three financial statements, including a balancing balance sheet, it really isn't much of a leap to build a model that includes the specifics gametheory referenced in his earlier post.

Dec 21, 2016 - 12:21pm

Smuguy, when you say "blood sweat and tears," what exactly are you referring to. As a former MBB consultant, did you just look at models from PE due diligence and try to rebuild them? Get a training program (e.g. Analyst Exchange)? Get help from friends at BBs or PE funds? I'm starting at MBB next year, and am interested in PE down the road and willing to put in "blood sweat and tears," but do not quite know how I will be able to do so...

Thanks for your help.

Dec 21, 2016 - 12:22pm
js08:
Smuguy, when you say "blood sweat and tears," what exactly are you referring to. As a former MBB consultant, did you just look at models from PE due diligence and try to rebuild them? Get a training program (e.g. Analyst Exchange)? Get help from friends at BBs or PE funds? I'm starting at MBB next year, and am interested in PE down the road and willing to put in "blood sweat and tears," but do not quite know how I will be able to do so...

Thanks for your help.

Was referring mostly to the trial-by-fire that I underwent after starting at the fund. I had a decent finance background and was able to build a basic lbo model before starting in PE (this was mostly self-taught, from practicing building models and asking questions from current / former bankers). I was also fortunate enough to have worked closely with a PE associate as part of a PEG acquisition diligence case - and was able to learn a bit by riding side-car with the associate on the project.

However, the funds I interviewed with did not expect a level of financial acumen similar to that expected of IB interviewee candidates. Perhaps a more formalized training program may be of help, but I'd say to the extent that you can get a decent understanding of how the three financial statements flow in the context of an LBO, you'll be fine.

Dec 21, 2016 - 12:28pm

Not sure what the difference is. When I was in banking our basic LBO page was one worksheet (and it was very extensive) and so is my firm's quick and dirty LBO. It ends up printing out the same if you adjust the print area accordingly and it's much easier to work with from a time perspective when you're not control+pgup/down back and forth to link up your sheets.

Dec 21, 2016 - 12:29pm

I did my modeling tests on one worksheet as well. I prefer to scroll up and down on a worksheet than switch tabs unless there's a distinct need for a separate tab.

​* http://www.linkedin.com/in/numicareerconsulting
Dec 21, 2016 - 12:30pm

how about that some HFs require their interns during interviews to build models eventhough they don't have experience in modeling?

Dec 21, 2016 - 12:31pm

Modeling Practice (Originally Posted: 06/14/2017)

What is a good starting point for learning to model like a pro? It seems like the vast majority of modeling is centered around LBO's. Is that because it is the most comprehensive? What other models are important to learn and construct for different types of deals/lending. Where can you find these templates/tutorials or is it better to start from scratch? Want to go from rookie to pro

Dec 21, 2016 - 12:35pm

You'll get the best bang for your buck taking an online course.
As for texts: Opinions vary, I personally like financial modelling MIT
However, there are some good free resources, e.g. Macabacus.com (under the learn finance option at the bottom of the page) is an amazing very comprehensive overview.
Hope this is a good start and what your looking for.

  • 2
Dec 21, 2016 - 12:40pm

Modelling Test - Private Equity Internship (Originally Posted: 11/21/2015)

Hi Guys,

Wanted to ask for your advice. I'm due for an in-office modelling test for a long-term private equity intern position (analyst level) for a large PE firm, and they said that my test would take 1.5-2 hours and basically be a DDM. However, this confused me because a DDM is usually really quick to implement, unless its for FIG correct? Therefore, I'm not sure if there is anything else that is entailed, as 2 hours seems like a relatively long time for a DDM.

Can you let me know what you guys think and what your insight is? Many thanks!

Dec 21, 2016 - 12:41pm

If you have to ask...

Seriously, what do you think you're going to have to do? They're going to give you a publicly traded dividend-paying stock and ask you to value it by punching three numbers into Excel?

Edit: Sorry, I see you're just a student, not an analyst.

You have to think:

1) How do PE firms make money? They buy companies, sweep what cash they can while they own them, and then sell them. In this sense, what is a dividend? The amount of cash available to be distributed to the PE firm annually.

2) How do we figure out how much cash is available? By building a detailed operating model, taking into account revenue drivers, cost drivers, and all other non-financial cash inflows/outflows (eg capital expenditures, taxes, interest/amortization payments, working capital changes).

Dec 21, 2016 - 12:42pm

Hi Mrb87,

Really appreciate the detailed reply! That makes a lot more sense, and I'm guessing that they're likely asking me to calculate the levered free cash flows to derive the equity value so that I know how much cash is available to the PE firm after debt is paid off. In essence it should be similar to a DCF then, which makes a lot more sense. Many thanks!

Dec 21, 2016 - 12:44pm

Modeling Test - Not a lot of experience (Originally Posted: 12/16/2013)

What can I expect from a modeling test if I dont have too much experience in modeling? How the three statements connect and DCF analysis?

Dec 21, 2016 - 12:45pm

TheKid1:

I interviewed not too long ago for a MM firm and was invited back for a modeling test. Now I don't have much experiene in modeling. I told them in my previous jobs I did no modeling, exepct I am familiar with certain keyboard shortcuts and Vlookup and other basic formulas to make your life easier, however I did state I have signed up for Wall Street Prep and have began working through it not and not finished at all. What can I expect? What should I prep and only have two days time.


come on dude spelling/grammar plz
speed boost blaze
Dec 21, 2016 - 12:47pm

Modeling test help (Originally Posted: 11/29/2016)

Folks,

Passed the soft skills interview but invited back for a simple modeling test. It would be DCF but not sure which asset type and was told it won't be anything complicated. It's not an acquisition role but will be working on quarterly asset pricing and valuation.

Anyone had modeling test before and can share some insight? How should I prepare? Any advice and website to practice?

I don't have modeling experiences from work. But it's an interesting role. I hope I can get it and it seems the modeling test is the last step!

Thanks!

Dec 21, 2016 - 12:51pm

Preparing for Modeling Test (Originally Posted: 04/04/2012)

I have an upcoming interview for an associate position at a boutique investment bank. I am currently an M&A associate, but the new position would be as a generalist banker. I was told to expect a modeling test of some sort.

I once did a modeling test that simply asked me to put together a three-statement operating model. What should I expect here?

Dec 21, 2016 - 12:52pm

You should expect a document with loads of fairly easy-to-place figures.
A laptop with no useful files, as well perhaps an hour to build a model.

Make sure you do the following:

Make a section for assumptions (make and state additional assumptions clearly)
Colour code inputs (light blue)
Bold outputs such as NPV and IRR (in separate sections from inputs/assumptions)
Put at least one graph of cash flows for equity holders and debt holders.
Have a section discussion your results as well as what you data you could have had to improve the model

Nothing scary, I assure you.

  • Silver banana please*
- Ostende Mihi Pecuniam -
Dec 21, 2016 - 12:55pm

Common (or Not) Modeling Test Curveballs (Originally Posted: 12/27/2016)

So obviously, each firm has their own way of running these LBO tests, from template to Book1.xlsx. However, what are some difficult / tricky wrenches you've seen thrown into these that differentiate them from your typical vanilla LBO w/ simple assumptions? Hoping to hear both "common" tweaks as well as more difficult / technical curveballs, wrenches, etc.

Dec 21, 2016 - 12:56pm

Completely firm dependent.... could be anything.

"Standard" variations could be:

PIK Interest
OID
Div recap
Management options

Cross-capital structure guys may ask about equity vs Debt IRRs

Dec 21, 2016 - 12:57pm

Modeling Test - Test from BB (Originally Posted: 12/11/2012)

I have a modeling test that I need help with tonight. I am willing to send -- please PM if you think you can help and I will send it to you. Test is from a bulge bracket firm.

Dec 21, 2016 - 1:00pm

If you post it i'll spend 20 minutes or so looking at it

This to all my hatin' folks seeing me getting guac right now..
Dec 21, 2016 - 1:10pm

Depends on what you are doing... in general though there is a book called "Structured Finance Modeling with Object Oriented VBA" by Tick. It is an excellent guide to modeling cash flows for complex products using VBA and will introduce you not only to the basics, but also to more advanced topics like complex simulation.

Dec 21, 2016 - 1:11pm

Modeling test with a week to do it. Turn in early? (Originally Posted: 01/06/2011)

Gave it to me on Monday, said he wanted me to have the weekend to do it so it's not due til this coming Monday. Then I will sit down with them and walk them through what I've done.

Note that this is not a complete IS/BS/CF model, it is not a full blown lbo model, it is not like I'm interviewing with KKR here, it is not as complex as what many of you in IBD would expect.

Pro: Might look good. The other candidates could turn theirs in early so it'd be risky not to.

Con: Could appear arrogant/cocky. If I do turn it in early and later discover any imperfections then I could look like a douchebag.

Dec 21, 2016 - 1:12pm

Attention to detail is way more important than timeliness, assuming you have it in by its due date. Take your time and turn it in Monday. You don't want to have any doubt that you turned in your best work.

Dec 21, 2016 - 1:15pm

Congrats on the interview man. I would get as much of it done as early as possible, then skip a day and revisit it with the intention of catching any mistakes.

Chances are there will be some sort of error so turning it in early would imply a sense of recklessness/lack of attention to detail on your part. Just take your time and turn it in on the date requested.

Regards

"The trouble with our liberal friends is not that they're ignorant, it's just that they know so much that isn't so." - Ronald Reagan
Dec 21, 2016 - 1:17pm

Analyst Modeling Tests (Originally Posted: 02/12/2018)

Hi there,

Was wondering if anyone could PM me a modeling test used for first year analyst interview ? I can trade with another test!

Thanks!

It ain't what you know, it's who you know
Dec 21, 2016 - 1:18pm

Alibabes56, bummer your thread hasn't had a response yet. Sometimes bots are smarter than humans anyways:

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Or maybe the following pros can chime in... Mathagu Carivenm vaibhavatri

Hope that helps.

Dec 21, 2016 - 1:19pm

Modeling Exams (Originally Posted: 03/05/2010)

Has anyone taken the modeling exam at H.I.G.? My sister is interviewing with them and may have one coming up, but she hasn't had a modeling test yet so she's not sure what to expect. I haven't been there in about 4 years, but as far as I remember they give you a K and a Q, along with maybe some research, and have you build a simple lbo model. Anyone more recent and have a better idea of what these are all about? Thanks.

  • Bad Memory
Dec 21, 2016 - 1:21pm

Modeling Test - Currently IB analyst (Originally Posted: 02/19/2012)

Currently an IB Analyst interviewing at a large HF.

I have to build a model and pitch an investment recommendation. The latter I know what to do.

The former...

If the filing does not state D&A allocation in COGs/SG&A - what would you suggest I do?

Please, only people currently working on the street answer this. ,

Dec 21, 2016 - 1:22pm

Industry-specific...

What's the target's business model?

Array

Dec 21, 2016 - 1:25pm

As damngringo said you can check comps and then come up with and assumption for D&A based on that... if you are worried you can make a schedule with options for D&A and a trigger to choose which D&A you use going forward... can't imagine they would be upset about that... I don't think they would really be majorly concerned about your D&A assumption as long as it's reasonable... You run into similar issues with working capital... I usually just project based on receivable, inventory, and payable days...

Dec 21, 2016 - 1:26pm

If it's a software / hardware company - especially the later - there should be some D&A disclosed somewhere as it's unlikely they have made some acquisitions. Also, I'd suggest you not use comps as that will fuck up your PP&E going forward. You can get your historical depreciation by taking year X PP&E less year Y PP&E plus year Y Capex (roughly).

Also, try putting in a sneaky research library request for the company (if publicly traded and covered) and see if the analysts have broken it out.

Ace all your PE interview questions with the WSO Private Equity Prep Pack: http://www.wallstreetoasis.com/guide/private-equity-interview-prep-questions
Dec 21, 2016 - 1:27pm

Sorry guys, my fault. I have D&A on SOCF but i would like to project as many IS accounts as I can to see trends etc.

So, I'm not sure what the D&A allocation from SOCF is on the I/S.

Dec 21, 2016 - 1:30pm

modeling exam "assume total market leverage" (Originally Posted: 12/02/2012)

I recently took a modeling exam where I was instructed to assume that senior lender would provide term loan and revolver at "total market leverage and pricing." I translated this to mean current average leverage ratio and rates. I assumed total leverage for revolver + senior facility of 3.5x EBITDA. Also assumed revolver rate was LIBOR + 3.5% and senior term rate was LIBOR + 5%. Kind of pulled these #s out of my ass based on my limited understanding of roughly where the rates are today. Do these assumptions look reasonable to you guys? How would you go about estimating if you had 2 hours to build a 3 statement model?

Dec 21, 2016 - 1:31pm

The senior rate seems to be ok, I have been using 5% as well. I usually say that LIBOR is roughly 1% and that 400bps above is an average estimate for TLA. TLB is more like 500bps above. For the Revolver 3.5% is fine as well, you may even be able to justify 3% or 4%.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

Dec 21, 2016 - 1:32pm

mooseofplenty:
I recently took a modeling exam where I was instructed to assume that senior lender would provide term loan and revolver at "total market leverage and pricing." I translated this to mean current average leverage ratio and rates. I assumed total leverage for revolver + senior facility of 3.5x EBITDA. Also assumed revolver rate was LIBOR + 3.5% and senior term rate was LIBOR + 5%. Kind of pulled these #s out of my ass based on my limited understanding of roughly where the rates are today. Do these assumptions look reasonable to you guys? How would you go about estimating if you had 2 hours to build a 3 statement model?

It's reasonable. The only thing you may want to add is a LIBOR floor. Since LIBOR is so low this has recently become a common provision. So your LIBOR rate is the greater of the market rate or 4% or something. But I doubt that they are going to hold you to your assumptions unless you're a lev fin or DCM guy.

I am wise because I know that I know nothing -Socrates
Dec 21, 2016 - 1:33pm

You aren't going to have a 4% LIBOR floor on a loan financed today...mostly those are legacy facilities. Right now floors are 150-250bps. Recently saw a zero floor, NIRP is coming.

Dec 21, 2016 - 1:34pm

I would say the rates are in line with market assuming the company is a good credit (stable end markets, strong FCF, able to easily maintain >1.1 Fixed charge, etc.. For the revolver I would assume your revolver equals your TL A because they will be the same facility (unless you are assuming an ABL) and there wont be a floor on a TLA or revolver

Dec 21, 2016 - 1:35pm

Platime:
I would say the rates are in line with market assuming the company is a good credit (stable end markets, strong FCF, able to easily maintain >1.1 Fixed charge, etc.. For the revolver I would assume your revolver equals your TL A because they will be the same facility (unless you are assuming an ABL) and there wont be a floor on a TLA or revolver

Revolver should be a point or two lower than TLA IMO.

Dec 21, 2016 - 1:36pm

mooseofplenty:
I recently took a modeling exam where I was instructed to assume that senior lender would provide term loan and revolver at "total market leverage and pricing." I translated this to mean current average leverage ratio and rates. I assumed total leverage for revolver + senior facility of 3.5x EBITDA. Also assumed revolver rate was LIBOR + 3.5% and senior term rate was LIBOR + 5%. Kind of pulled these #s out of my ass based on my limited understanding of roughly where the rates are today. Do these assumptions look reasonable to you guys? How would you go about estimating if you had 2 hours to build a 3 statement model?

They seem pretty reasonable, but it depends on what type of companies you are talking about. 3.5x is a bit steep in the MM for senior on certain deals. We try and keep total leverage to 4-4.5x.

Dec 21, 2016 - 1:37pm

It doesn't really matter because when you model the LBO you would assume the senior is on the TL A and the revolver is undrawn at close. However, it wouldn't make sense for a revolver to be a point or two lower than a TL A otherwise companies would just finance with a revolver and have the flexibility to pay or not whenever they choose with no amort and save the 200 bps. The Revolver and TL A are sold as the same credit facility - a bank doesn't want to finance 3.5x on a revolver because if the company pays the revolver down quickly they don't make much money and the maintenance fee is minimal. They want that TL A to stay out there to keep getting their interest. An ABL revolver will certainly be a point or two lower as ABL lenders are comfortable liquidating assets if needed because they spend alot of time up front understanding the quality of inventory and AR and will usually only lend off of 70% of the CA anyway.

Agreed on the leverage. I would say doing 3.5x all senior makes sense for most industries but if you try and push leverage to 4.5x - 5.0x you'll have to shift things around a bit which will look more like 2.0x senior 2.5x sub.

Dec 21, 2016 - 1:40pm
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