OE - Advanced Leveraged Buyouts

Question 1

50m in cash flows per year 
200m bond with 10% interest 
Exit after 5 years 
Exit EBITDA: 60m 
Entry and exit EV / EBITDA: 8x 
Entry EBITDA: 40m 
What is cash on cash (assume no cash sweep)?

Answer 1

Entry EV: 8 x 40 = 320
Exit EV: 8 x 60 = 480
Interest Payments = 200 x 10% = 20 / year
Entry equity: EV = equity + debt - cash = 320 = x + 200 - 0 x = 120
Exit equity: EV = x + debt - acc. cash = 480 = x +200 - 5 x (50-20) = 430
Cash on cash multiple = 430/120 = 3.58x

Question 2

100m in cash flows per year 
100m in cash (operating cash to keep) 
250m bond with 10% interest 
Exit in 6 years 
Exit EBITDA: 75m 
Entry EBITDA: 50m 
Entry EV / EBITDA: 10x 
Exit EV / EBITDA: 13x 
What is cash on cash (assume no cash sweep)? 
What is cash on cash with cash sweep?

Answer 2

No cash sweep:
Entry EV: 10 x 50 = 500
Exit EV: 13 x 75 = 975
Interest payments = 250 x 10% = 25/year
Entry equity: EV = equity + debt - cash = 500 = x +250 - 100 = 350
Exit equity: EV = x + debt - acc. cash = 975 = x + 250 - [100 + 6 x (100-25)] = 1,275
Cash on cash multiple = 1,275 / 350 = 3.64x

Cash sweep:
Rather than accumulating the cash, all excess cash flow after servicing the debt is used to pay down the debt.
Cash on cash multiple = 1,373 / 350 = 3.92x

Question 3

150m in cash flows per year 
400m bond with 8% interest 
Exit in 5 years 
Exit EBITDA: 75m 
Exit EV / EBITDA: 11x 
Entry EBITDA: 50m 
Entry EV / EBITDA: 10x 
20m in capex per year 
What is the IRR assuming a cash sweep?

Answer 3

The IRR is the annualized cash on cash return. To answer this question, follow similar steps as the questions above, but be careful to include the additional capex in your calculation of excess cash flows left to repay debt.

Cash on cash multiple = 997 / 100 = 9.97x
IRR = (cash on cash) ^ (1/#of years) - 1 = 58.38%

Question 4

What are the main types of debt and what are their characteristics and differences?

Answer 4

Revolvers and term loans are provided by banks (they are sometimes called bank debt) and have maintenance covenants that typically require the issuer to maintain certain financial leverage ratios.

Revolvers are the most senior type of debt and therefore carry the lowest interest rate. They act like a credit card for a company. The company received a limit to how much it can spend and can draw on the revolver as needed. They are issued by banks and are typically secured by the company’s assets.

Term loans come next in seniority. Term loan A have straight line amortization so the principal gets paid each month. Term loan B may have a small amount of amortization but most of the principal is paid off at the end of the loan. Both are secured by the company’s assets.

Following bank debt are other types of riskier unsecured debt, often issued to investors such as hedge funds, merchant banks, and mezzanine funds. These debt instruments typically carry incurrence covenants which prevent a company from taking certain actions such as selling assets or making large capital expenditures. They often have a single bullet payment on principal meaning that all principal is paid at the end of loan.