Hi guys,
I recently had a capital structure test at a PE firm, and wanted to ask for your guidance on how to solve it.
- EBITDA 100m
- Multiple: 7x
- Senior funding: 4y 4x EBITDA, 96 OID (LIBOR was given)
- Mezzanine: 7y 2x EBITDA 12% interst (10 cash 2 PIK) + 2% fee
- Base case equity return: 5y 25 IRR%
- Debt bullet
Question: calculate IRR and MoM for senior funding, mezz and equity under base case.
Can someone explain me on how to approach this? It wasnt a LBO modelling given that no other assumption was given (test was 20-30mn long).
Thanks!
(I) TEV — 100 x 7 = 700
(II) Sources & Uses U — 700 + 96 OID + 4 Fee Total = 800 S — 400S + 200M + 200 Equity Total = 800
(III) Debt Schedule - S Cash Interest based on LIBOR + x% No mention of Amortization
Debt Schedule - M Beg Bal = 200 , Non Cash Interest 2% = 204 End Bal, Cash Interest 10% on End or Avg Bal
(IV) Life of OID + Financing Fee — 4 yrs assumption (96/4 +4/4) = 25
Calc Returns
Looking for more experienced folks to jump in and see how they would approach this..
TripleARated Thanks for taking the time ! While the approach is getting more clearer to me, I am still struggling to understand calculating the returns (IRR and MoM) for the two debt tranche. For the equity, it is clear that it must be IRR 25% (as it is given), and an MoM of ~3x (Equity of 600), but what about the the returns for the Senior/Mezz - how do i calculate these/how would i do that?
TripleARated your Sources & Uses is not correct. "96 OID" means that the debt is issued for 96% of face value and you can think of the other 4% as an origination fee.
Total financing fees would be 16 + 4 = 20
The OID essentially reduces the cash the lenders put up up front so the initial cash outflow for them is slightly smaller, thus boosting their IRR
You have your outflows / principal for both the senior debt and Mezz, you have your inflows which are interest payments, we have bullet repayment at the end of tenors (for both instruments).
I would calculate my IRR based on the above.....
Don't forget that the PIK gets capitalised every time you calculate your interest.
Possimus eaque fugiat similique dolores. Maiores asperiores aspernatur et accusamus nam. Et quae at ut perspiciatis voluptatem iste. Omnis quis rerum iusto dolorem corporis consequatur consequatur natus. Nulla numquam magni corrupti eius numquam sint.
Consequatur sunt repellendus labore neque. Autem aut explicabo sit et molestiae nulla. Et in et voluptas esse. Aut enim necessitatibus optio ipsa voluptates incidunt. Sit sit dolor aut. Corporis iure sed eum magni libero aut incidunt.
Consequatur quasi voluptatem quae non facere ullam blanditiis. Et cum enim alias a expedita repellat et. Nesciunt amet amet voluptate sunt enim non et. Magni illum blanditiis aperiam odio corrupti.
Odio fuga sequi sit sed. Modi voluptatum qui nihil ut labore est ex. Sit sint eius sapiente est aspernatur id qui. Reprehenderit suscipit quas tempore dolor molestias repellat quasi. Consequatur sit eveniet earum sapiente repudiandae. Eos debitis qui est.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...