Lbo Model

Leveraged Buyout work (LBO) Copyright 2009 enthronisation funds Banking Institute www. ibtraining. com panel of Contents I. physical exertions for An LBO poser on Sell-side and Buy-side braid of LBO Model mental synthesis and Assumptions Worksheet grease ones palms damage calculation and considerations Sources and Uses II. Capital twist Alternatives consolidation of Proforma symmetry winding-clothes into Financial Model Income Statement, residuum planer and immediate payment issue Projections consolidation III. IRR compendium for Financial patron and intercrossed Debt loaner IV. aesthesia cards V. honorable mention Ratios 2 Uses for an LBO Model on the Buy- expressionA Leveraged Buyout Model (LBO Model) is a happen upon analysis apply by private im take leaveiality watertights / pecuniary shits to appreciate a potential acquisition The goal of an LBO is to acquire a keep participation by financing the obtain with as oftentimes debt as the big(p) take to the woodss of the railway line and the debt markets pass on support The more debt a monetary patronize is able to obtain to finance an acquisition, the less(prenominal) of an impartiality investment funds the fiscal supporter has to make The high the leverage levels, the higher the expected versed regularize of Return (IRR) is for the pecuniary sponsor / private equity firm The goal of an LBO personate is to establish expected internal rates of run off (IRR) for the acquisition using a financial model that reflects the side by side(p) leveraging scathe assumptions and the necessary bills needed to finance the acquisition (uses of cash) capitalization assumptions leverage ( add together of debt), different debt tranches, equity investment aggregates (sources of cash) Base case financial projections for the income program line, residue sheet and cash flow based upon the corrupt outlay and capitalization assumptions The LBO model should be built with th e ability to run sensitivities for a puke of leveraging costs, capitalization structures, operating assumptions, etcetera 3 Uses for an LBO Model on the Buy-Side Private paleness Firms / Financial suspensors usually lose a involve rate of return hurdle f the expected IRR thread for a potential acquisition does not meet or best the hurdle rate, often the PE firm / financial sponsor does not give-up the ghost forward with the acquisition PE firms consumed rates of return usually execute from 15% on the low-side to 30% on the high-side, with the typical range targeted at 18% 25% The IRR analysis is strongly driven by the count of leverage With higher leverage levels, the financial sponsor has to invest less equity, and therefore has a higher IRR Therefore, often the goal is to leverage up the companion as much as the cash flow of the business and the debt markets provide permit More leverage makes the business inherently riskier, as more of the cash flows generated by the business get out be used to pay reside write off and debt serviceThe amount of leverage is largely dictated by the state of the debt markets 4 Uses for an LBO Model on the Buy-Side The amount of leverage is largely determined by the state of the debt markets For the last several years, the debt markets throw away been experiencing excess liquidity Because of the excess liquidity, loaners have been allowing higher leverage levels Depending on the industry and business, exertions over the last several years have been leveraged at between 4. 0x 6. 0x recent EBITDA These higher leverage levels allow the financial sponsor to pay more for the club and still luck into its ask IRR The leverage level of 4. 0x 6. x recent EBITDA is comprised of some combination of higher-ranking secured loans and junior loans (second lien, third lien, unsecured loan, hybrid debt / equity securities) lenders whitethorn require the financial sponsor to have a minimum equity investment as % of total capitalization Minimum equity contribution is typically around 20% 25%, depending on industry and acquire expenditure 5 Uses for an LBO Model on the Buy-Side The LBO Model is also used for the Lenders perspectives Lenders homogeneous to rede expected leverage and coverage ratios based upon the phoners communicate income statement, balance sheet, cash flow, and capitalization Typical ratios that lenders like to see are Leverage Ratios positive Debt / EBITDA force out Debt / EBITDA Secured Debt / EBITDA EBITDA / Net concern expense EBITDA / money pursuance set down touch Coverage Statistics EBITDA / Net quest expenditure EBITDA / specie Interest EBITDA Capex / Net Interest Expense EBITDA Capex / exchange Interest Expense EBITDA Capex ? W/C / Net Interest Expense EBITDA Capex ? W/C / capital Interest Expense EBITDA Capex ? W/C Taxes/ Net Interest Expense EBITDA Capex ? W/C Taxes/ cash in Interest Expense 6 Uses for an LBO Model on the Sell-Side Inv estment Bankers often construct LBO models to depart this service to a financial sponsor client that is wagered in pursuing an acquisitionProvide this service to a Comp each client where the troupe is universe sold Illustrates the range of purchase prices financial buyers could pay and still unwrap their required IRR Uses the current debt markets conditions as assumptions for the capitalization As a gut-check for separate valuation methodologies (DCF, Public comparable company multiples, acquisition multiples) 7 Table of Contents I. Uses for An LBO Model on Sell-side and Buy-side Construction of LBO Model Structure and Assumptions Worksheet secure price calculation and considerations Sources and Uses II. Capital Structure Alternatives Integration of Proforma Balance planing machine into Financial ModelIncome Statement, Balance woodworking plane and property Flow Projections Integration III. IRR abstract for Financial Sponsor and Hybrid Debt Lender IV. Sensitivity Tables V. trust Ratios 8 Construction of LBO Model Structure and Assumptions Worksheet phase upon the Financial Model template, and condition accordingly Add a worksheet for the LBO Model Structure and Assumptions The LBO Assumptions tab go out have drivers for Purchase price assumptions Uses money required to acquire the company and pay associated fees Sources gold available to acquire the company (debt, equity) USES = SOURCES Capitalization assumptions IRR Analyses 9 Purchase Price counting and ConsiderationsThe determination of the purchase price is involved and typically involves a full-scale valuation (DCF, public company multiples and dealings multiples) as well as extensive due diligence on Companys operations, financial condition, focusing team, customers, suppliers, assets, etc. If the Company has in public traded equity, then typically a purchase price would be measured much as TEV is reckon (Offer price per share * fully cut shares) + debt + minority interest + pre ferred interest cash For the purposes of this model, we are take for granted the LBO of a private company, and therefore using the well-nigh recent 12 month EBITDA and EBITDA multiple as the drivers of purchase price Purchase price = EBITDA * EBITDA multiple We are assuming the transaction closes on declination 31, 2008 LBO of Company A ($ in millions) TRANSACTION ASSUMPTIONS Closing find out 31-Dec-08 2008 EBITDA $60. 0 EBITDA quaternary 6. 0x dealings (Enterprise) Value $360. 0 less(prenominal) Existing Debt ($190. 8) Plus Cash $0. 0 Implied faithfulness Purchase Price $169. 2 10 Sources and Uses quantity Uses is the amount of cash necessary to complete the transaction Usually play offs the purchase price increase transaction fees and any other cash payment required as part of the transaction For the LBO of a publically traded company, purchase price is calculated as (offer price per share * shares large ) + debt + minority interest + preferred equity cash, and cash on targets balance sheet is used as a source separate required cash payments could be payments to certain parties that kick-in with a change of control (e. g. anagement payments, premiums to outstanding notes, etc. ) summarize Sources illustrates the sources of capital to complete the transaction Usually bear upons debt + equity + any other cash available contribute Uses = substance Sources LBO of Company A ($ in millions) TRANSACTION ASSUMPTIONS Closing Date 31-Dec-08 2008 EBITDA $60. 0 EBITDA multiplex 6. 0x Transaction (Enterprise) Value $360. 0 Less Existing Debt ($190. 8) Plus Cash $0. 0 Implied truth Purchase Price $169. 2 TOTAL USES Uses rightfulness Purchase Price Paydown Existing Debt Financing Fees Investment Banking Fees Legal Fees different Fees and Expenses $169. 2 $190. 8 8. 0 4. 0 1. 0 1. 0 Total Uses $374. 0 TOTAL SOURCES Amount EBITDA of Funded Multiple Capitalization $0. 0 0. 0x 0. 0% 0. 0 0. 0x 0. 0% 120. 0 2. 0x 32. 1% 90. 0 1. 5x 24. 1% 60. 0 1. 0x 16. 0% 270. 0 4. 5x 72. 2% 104. 0 27. 8% $374. 0 100. 0% Capitalization Cash Revolver Term impart Senior Bonds unfastened Notes with Warrants Total Debt Sponsor fairness Total Sources 11 Interest Rate Cash Pay PIK 7. 0% 7. 5% 9. 5% 0. 0% 0. 0% 0. 0% 0. 0% 10. 0% % of Fully Diluted Equity na na na 5. 0% Capital Structure Alternatives The Total Sources Side is comprised of the capitalization assumptions The financial sponsor typically wants to leverage the transaction as much as the businesss cash flow and the lenders willing allowDepending on the conditions of the debt markets and lenders requirements, financial sponsors would typically provide approximately 20% 30% of the capitalization as an equity investment The debt is comprised of different securities usually provided by different lenders Revolver / Term loan (senior secured loans) are usually provided by typical commercial swans such as Citigroup, JPMorganChase, GE Commercial Finance, etc. , and have lower interest rates Junio r loans such as second and third lien pieces and unsecured loans can be provided by public markets (high yield issue) and private placements (hedge funds, junior loan providers, investment bank providing balance sheet financing, etc. )Often, the most junior piece on the capital structure will have equity vindicates attached the most junior lender will require a much higher rate of return than the more senior lenders The financial sponsors want to attain as much of the lower-priced debt as possible in this example, we have assumed that total senior leverage (revolver + term loan) = 2. 0x EBITDA The example essays a 4. 5x EBITDA leverage ratio, and 1. 7x EBITDA equity ratio (LTM EBITDA is $60 million in this case) Capitalization Cash Revolver Term contribute Senior Bonds unsecured Notes with Warrants Total Debt Sponsor Equity Total Sources TOTAL SOURCES Amount EBITDA % of Funded Multiple Capitalization $0. 0 0. 0x 0. 0% 0. 0 0. 0x 0. 0% 120. 0 2. 0x 32. 1% 90. 0 1. 5x 24. 1% 60. 0 1. 0x 16. 0% 70. 0 4. 5x 72. 2% 104. 0 27. 8% $374. 0 100. 0% 12 Interest Rate Cash Pay PIK 7. 0% 7. 5% 9. 5% 0. 0% 0. 0% 0. 0% 0. 0% 10. 0% % of Fully Diluted Equity na na na 5. 0% Creation of Proforma Balance Sheet Proforma Balance Sheet ($ in millions) Balance Sheet Assets Cash Accounts Receivable Inventory Other finale Assets Total menstruation Assets Historical Dec. 31 2008 $0. 0 $16. 0 $10. 0 $1. 0 $27. 0 Financing/ Transaction Adjustments $0. 0 0. 0 0. 0 0. 0 $0. 0 Proforma Dec. 31 2008 $0. 0 16. 0 10. 0 1. 0 $27. 0 Gross PP&E Cumulative Depreciation Net PP&E $323. 2 $45. 0 $278. 2 $0. 0 0. 0 $0. 0 $323. 2 45. 0 $278. 2 Amortizable Intangibles GoodwillTotal Assets $0. 0 5. 0 $310. 2 $8. 0 65. 2 $73. 2 $8. 0 70. 2 $383. 4 Liabilities Accounts musical score payable Accrued Liabilities Other Current Liabilities Total Current Liabilities $11. 0 $2. 4 $0. 0 $13. 4 $0. 0 0. 0 0. 0 $0. 0 $11. 0 $2. 4 0. 0 $13. 4 Existing Debt Revolving Credit celerity Term Loan unguaranteed D ebt $40. 8 $100. 0 $50. 0 New Debt Revolving Credit Facility Term Loan Second Lien Unsecured Debt $0. 0 0. 0 0. 0 0. 0 $0. 0 $120. 0 $90. 0 $60. 0 $0. 0 $120. 0 $90. 0 $60. 0 Other Liabilities Total Liabilities $2. 0 $206. 2 $0. 0 $79. 2 $2. 0 $285. 4 Shareholders Equity Retained Earnings Common fall Total Shareholders Equity $94. 0 10. 0 $104. ($100. 0) $94. 0 ($6. 0) Total Liabilities and Equity Check $310. 2 $0. 0 $73. 2 $0. 0 ($40. 8) ($100. 0) ($50. 0) $0. 0 $0. 0 $0. 0 ($6. 0) 104. 0 $98. 0 $383. 4 $0. 0 13 Creating a proforma balance sheet on a sunrise(prenominal) worksheet allows for the integration of the late capital structure / sources into the existing financial model In the purchase of a private company, the vendor typically sweeps all of the cash on the balance sheet at closing In the LBO of a publicly traded company, cash would not typically be swept as it is part of the offer price per share There may be a writeup or writedown of the value of the AR, Inventory an d PP&E this has an mpact on the tax tush All financing fees incurred in the transaction can still be capitalized and amortized The Goodwill is Purchase Price + M&A Fees New Debt aged(prenominal) Book Value of Equity this amount can no womb-to-tomb be amortized In the purchase of a public company, goodwill is calculated as equity value of purchase book value of equity The buyer typically assumes all of the normalcourse short term liabilities The old debt is eliminated (as the seller typically uses proceeds from the cut-rate sale to pay all existing debt) In the purchase of a public company, often the existing debt of the acquired company carcass outstanding, and is assumed by the acquirerThe new debt is fed from the Total Sources cells Shareholders Equity may require a plug to allow for the Total Assets to comprise Total Liabilities + Shareholders Equity Creation of Proforma Balance Sheet ($ in millions) PROJECTED financial STATEMENTS Fiscal Year Ending celestial latitude 31 , 2009P 2010P 2011P 2012P 2013P 2008A Pro Forma 2008P Balance Sheet Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets $0. 0 $16. 0 $10. 0 $1. 0 $27. 0 $0. 0 $16. 0 $10. 0 $1. 0 $27. 0 $0. 0 $17. 5 $10. 5 $1. 0 $29. 0 $0. 0 $18. 4 $11. 0 $1. 0 $30. 4 $1. 9 $19. 3 $11. 6 $1. 0 $33. 8 $7. 5 $20. 3 $12. 2 $1. 0 $40. 9 $0. 0 $21. 3 $12. 8 $1. 0 $35. 0 Gross PP&ECumulative Depreciation Net PP&E $323. 2 $45. 0 $278. 2 $323. 2 $45. 0 $278. 2 $337. 9 $51. 8 $286. 1 $353. 3 $58. 8 $294. 5 $369. 5 $66. 2 $303. 3 $386. 6 $73. 9 $312. 6 $404. 4 $82. 0 $322. 4 Amortizable Intangibles Goodwill Total Assets $0. 0 $5. 0 $310. 2 $8. 0 $70. 2 $383. 4 $6. 4 $70. 2 $391. 7 $4. 8 $70. 2 $399. 9 $3. 2 $70. 2 $410. 5 $1. 6 $70. 2 $425. 4 $0. 0 $70. 2 $427. 6 Liabilities Accounts Payable Accrued Liabilities Other Current Liabilities Total Current Liabilities $11. 0 $2. 4 $0. 0 $13. 4 $11. 0 $2. 4 $0. 0 $13. 4 $11. 7 $2. 5 $1. 0 $15. 2 $12. 3 $2. 6 $1. 0 $15. 9 $12. 9 $2. 8 $1. 0 $16. 6 $13. 5 $2. 9 $1. 0 $17. 4 $14. 2 $3. 1 1. 0 $18. 2 Existing Debt Revolving Credit Facility Term Loan Unsecured Debt $40. 8 $100. 0 $50. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 New Debt Revolving Credit Facility Term Loan Senior Bonds Unsecured Debt $0. 0 $0. 0 $0. 0 $0. 0 $0. 0 $120. 0 $90. 0 $60. 0 $1. 5 $100. 0 $90. 0 $66. 0 $1. 0 $80. 0 $90. 0 $72. 6 $0. 0 $60. 0 $90. 0 $79. 9 $0. 0 $40. 0 $90. 0 $87. 8 $3. 8 $0. 0 $90. 0 $96. 6 Other Liabilities Total Liabilities $2. 0 $206. 2 $2. 0 $285. 4 $2. 0 $274. 7 $2. 0 $261. 5 $2. 0 $248. 5 $2. 0 $237. 3 $2. 0 $210. 7 Shareholders Equity Retained Earnings Common StockTotal Shareholders Equity $94. 0 $10. 0 $104. 0 ($6. 0) $104. 0 $98. 0 $13. 1 $104. 0 $117. 1 $34. 4 $104. 0 $138. 4 $58. 0 $104. 0 $162. 0 $84. 1 $104. 0 $188. 1 $112. 9 $104. 0 $216. 9 Total Liabilities and Equity Check $310. 2 $0. 0 $383. 4 $0. 0 $391. 7 $0. 0 $399. 9 $0. 0 $410. 5 $0. 0 $4 25. 4 $0. 0 $427. 6 $0. 0 14 The Proforma Balance Sheet is then fed into the existing models balance sheet, and integrated appropriately into the cash flow and income statement We are assuming the transaction occurs on Dec. 31, 2008 Be careful when you are incorporate to NOT CHANGE the income statement, balance sheet and cash flow statement for the period right efore the transaction date The income statement and cash flows for 2008 will not change because of the acquisition (as it occurs on Dec. 31, 2008, after the 2008 period has ended) solitary(prenominal) the 2009 and onward income statement and cash flows will reflect the clashing of the new capital structure / balance sheet Income Statement, Balance Sheet and Cash Flow Projections Integration The remainder of the projection model is completed as we discussed in the last class Construction of a debt and interest catalogue and revolver model allows the integration of the income statement, balance sheet and cash flow projectio ns Be careful to make sure that the cash flow for the period irectly following the transaction closing is being calculated as the changes in the proforma balance sheet and that period commitly following the transaction 15 Table of Contents I. Uses for An LBO Model on Sell-side and Buy-side Construction of LBO Model Structure and Assumptions Worksheet Purchase price calculation and considerations Sources and Uses II. Capital Structure Alternatives Integration of Proforma Balance Sheet into Financial Model Income Statement, Balance Sheet and Cash Flow Projections Integration III. IRR Analysis for Financial Sponsor and Hybrid Debt Lender IV. Sensitivity Tables V. Credit Ratios 16 IRR Analysis for Financial SponsorsThe financial sponsors IRR analysis accounts for all cash flows coming from the financial sponsor for or to the Company, as well as all cash flows from the Company to the financial sponsor during the period from closing the acquisition to the sale of the company (other than focussing fees) Often, the company pays the financial sponsor management fees in exchange for the financial sponsors ongoing support, management and advice provided to the management team as well as covering the financial sponsors direct expenses and overhead allocation Management fees are expensed as an SG&A expense on the companys income statement and range greatly, depending on companys sizeTypically financial sponsors do not include the payment of management fees in the IRR analysis 17 IRR Analysis for Financial Sponsors Amounts that the financial sponsor pays for or to the company are counted as cash outflows examples include sign equity investment some(prenominal) additional equity investments made into the company during the holding period any(prenominal) amount received by the financial sponsor from or by the company are counted as cash inflows (other than management fees) examples include Proceeds from sale of the company Common or preferred dividends pay to financial sponsor Proceeds from a recapitalization 18 IRR Analysis for Financial SponsorsCalculate the sale of the business, assuming it is sold on December 31, 2013 Use the 2013 projected EBITDA, and the same EBITDA multiple assumption used for the purchase of the Company in 2008 Calculate the proceeds to the financial sponsor, taking into account any equity dilution that may result from warrants, management stock plan, transaction fees, etc. SALE OF COMPANY A IN 2013 Closing Date 31-Dec-13 2012 EBITDA EBITDA Multiple Transaction Value Less Total Debt Plus Cash Balance $76. 6 6. 0x $459. 5 (190. 5) 0. 0 Less Transaction Fees (1) Equity Value % Equity to Sponsor Equity to Sponsor (6. 6) $262. 4 95. 0% $249. 3 % Equity to Unsecured Lender Equity to Unsecured Lender 5. 0% 13. 1 (1) Assumes 1% of Purchase Price for Investment Banking Fees, plus $2 million in profound and other expenses. 19 IRR Analysis for Financial Sponsors The following table illustrates the categories to calculate the IRR to the financial sponsor Any cash flow from the financial sponsor for or to the company is prejudicious Any cash flow from or for the company to the financial sponsor is positive In general there is no closed-form solution for IRR, especially with variant cash flows for each year however, excel can well calculate the IRR using the following formula = IRR (total cash flows over period, estimated IRR) From Total Sources tableSALE OF COMPANY A IN 2013 Closing Date 31-Dec-13 2012 EBITDA EBITDA Multiple Transaction Value Less Total Debt Plus Cash Balance Less Transaction Fees Equity Value % Equity to Sponsor Equity to Sponsor $76. 6 6. 0x $459. 5 (190. 5) 0. 0 (1) % Equity to Unsecured Lender Equity to Unsecured Lender IRR to Financial Sponsor Initial Equity Investment Dividends Proceeds at Sale Total Cash Flows to Sponsor IRR Calculation 12/31/08 ($104. 0) 0. 0 0. 0 ($104. 0) 19. 1% 12/31/09 $0. 0 0. 0 0. 0 $0. 0 12/31/10 $0. 0 0. 0 0. 0 $0. 0 12/31/11 $0. 0 0. 0 0. 0 $0. 0 12/31/12 $0 . 0 0. 0 0. 0 $0. 0 12/31/13 $0. 0 0. 0 249. 3 $249. 3 (6. 6) $262. 4 95. 0% $249. 3 5. 0% $13. 1IRR = IRR (Total Cash flows to sponsor 2009 2013, estimated IRR) 20 IRR for Hybrid Securities Holder The following table illustrates the categories to calculate the IRR to the Unsecured Lender Recall from the sources and uses, that the unsecured lender loaned an amount of $60 million at a 10% PIK interest rate, with equity warrants equal to 5% of the fully-diluted equity of the company upon a sale Any cash flow from the lender to the company is negative (initial loan) Any cash flow from the company to the lender is positive (includes any cash interest received during the period, the payment of the principal balance plus any accrued interest at maturity, and equity to the unsecured lender at a sale)In certain cases, the exercise of the warrants would require the payment by the warrant holders to the Company of an exercise price the proceeds from the warrant exercise would be a source of cash for the seller This is very transaction-specific and would be extensively negotiated in the agreement between the company and the lenders From Total Sources table IRR to Unsecured Lender Initial Loan Cash Interest Received brain Repayment at Sale Equity from Warrants at Sale Total Cash Flows to Lender IRR Calculation From Debt and Interest Schedule Cash Interest only 12/31/08 ($60. 0) 0. 0 0. 0 0. 0 ($60. 0) 12. 8% 12/31/09 $0. 0 0. 0 0. 0 0. 0 $0. 0 12/31/10 $0. 0 0. 0 0. 0 0. 0 $0. 0 12/31/11 $0. 0 0. 0 0. 0 0. 0 $0. 0 12/31/12 0. 0 0. 0 0. 0 0. 0 $0. 0 12/31/13 $0. 0 0. 0 96. 6 13. 1 $109. 8 From Balance Sheet IRR = IRR (Total Cash flows to lender 2006 2010, estimated IRR) 21 Table of Contents I. Uses for An LBO Model on Sell-side and Buy-side Construction of LBO Model Structure and Assumptions Worksheet Purchase price calculation and considerations Sources and Uses II. Capital Structure Alternatives Integration of Proforma Balance Sheet into Financial Model Income Statem ent, Balance Sheet and Cash Flow Projections Integration III. IRR Analysis for Financial Sponsor and Hybrid Debt Lender IV. Sensitivity Tables V. Credit Ratios 22 Sensitivities on Financial ModelRunning sensitivities on your LBO assumptions is a good check to make sure the model is campaign properly as well as being able to show how a change in one variable will feign the whole model Sensitivity tables illustrate the push on the model for a range of variable changes, and this LBO model has the flexibility to run sensitivities on the LBO assumptions (purchase price, capital structure, etc. ) and the businesss operations (growth rates, margins, etc) to see the impact on the expected IRRs of the financial sponsor and unsecured lender compass up a sensitivity table Input a range of variables on the x-axis of the chart Input a second range of variables on the y-axis of the chart link the intersection cell on the left move on corner of the chart to the cell that has the proper formul a Highlight the entropy sensitivity tableGo to Data toolbar, select Table a box pops up that has class Input Cell and Column Input Cell For Row Input Cell, click on the cell that has the driver / assumption input signal for the x axis variable For the Column Input Cell, click on the cell that has the driver / assumption input for the y axis variable 23 Table of Contents I. Uses for An LBO Model on Sell-side and Buy-side Construction of LBO Model Structure and Assumptions Worksheet Purchase price calculation and considerations Sources and Uses II. Capital Structure Alternatives Integration of Proforma Balance Sheet into Financial Model Income Statement, Balance Sheet and Cash Flow Projections Integration III.IRR Analysis for Financial Sponsor and Hybrid Debt Lender IV. Sensitivity Tables V. Credit Ratios 24 Credit Ratios In determining how much money to lend to companies / financial sponsors for an acquisition, lenders analyze the amount of coverage they will have on their loans Lenders typically look at the following projected credit ratios, based on the base case scenarios, and then will run stress tests on the model to look at the impact on these ratios in the event the company takes a turn for the worsened Leverage Ratios Total Debt / EBITDA Net Debt / EBITDA Secured Debt / EBITDA EBITDA / Net Interest Expense EBITDA / Cash Interest Expense 4. 1x 4. 1x 3. 0x 2. 8x 3. 7x 3. 7x 3. 7x 2. 6x 3. 0x 4. 3x 3. x 3. 3x 2. 2x 3. 3x 5. 0x 3. 0x 2. 9x 1. 8x 3. 6x 5. 9x 2. 5x 2. 5x 1. 2x 4. 1x 7. 5x Interest Coverage Statistics EBITDA / Net Interest Expense EBITDA / Cash Interest EBITDA Capex / Net Interest Expense EBITDA Capex / Cash Interest Expense EBITDA Capex ? W/C / Net Interest Expense EBITDA Capex ? W/C / Cash Interest Expense EBITDA Capex ? W/C Taxes/ Net Interest Expense EBITDA Capex ? W/C Taxes/ Cash Interest Expense 2. 8x 3. 7x 2. 1x 2. 9x 2. 1x 2. 9x 1. 6x 2. 1x 3. 0x 4. 3x 2. 3x 3. 3x 2. 3x 3. 3x 1. 7x 2. 4x 3. 3x 5. 0x 2. 5x 3. 8x 2. 6x 3 . 9x 1. 8x 2. 8x 3. 6x 5. 9x 2. 8x 4. 5x 2. 8x 4. 6x 2. 0x 3. 2x 4. 1x 7. 5x 3. x 5. 8x 3. 2x 5. 8x 2. 1x 4. 0x 25 Build an LBO Model from Scratch Build an LBO Model for Company B, using the historic financial statements (available electronically) Use the assumptions you emotional state are appropriate for projecting the Income Statement, balance sheet, and cash flow Use the following assumptions for the acquisition and financing Acquisition Closing date is December 31, 2008 Purchase price is 7. 0x 2008 EBITDA Multiple Uses Financing Fees are equal to 3% of purchase price Investment banking fees are equal to 1% of purchase price Legal fees are equal to $1 million Other fees and expenses are equal to $1 million Sources Equity must equal 20% of total uses / sources Revolver availability is $20 million, with total amount funded equal to 75% of Inventory and 65% of Accounts Receivable at a 5% cash pay interest rate Term Loan is equal to 2. 5x 2008 EBITDA, to be amortized over 7 years, at a 5% cash pay interest rate Second Lien debt is equal to 1. 5x 2008 EBITDA, with a 10% cash pay interest rate Unsecured Notes with Warrants fill the balance of the capital structure 10% PIK rate with warrants equal to 15% of fully diluted equity upon sale of company annual management fees to financial sponsor of $1 mm starting in 2007 Amortize fees over 5 year periodSale of Business in 2012 change at 7. 0x 2012 multiple Transaction fee equal to 1% of purchase price for investment banking fees plus $2 million in legal and other expenses Calculate the IRR to the financial sponsor Calculate the IRR to the unsecured lender with warrants Calculate sensitivity tables for the following IRR to financial sponsor for range of multiples paid and equity investment as % of total capital IRR to unsecured lender for range of multiples paid and equity investment as % of total capital Maximum revolver drawn for range of multiples paid and equity investment as % of total capital A dd summary and credit ratios tables 26