A series of videos explaining the most common distribution waterfall used in private equity is available below. (For a written explanation please click here.)
We are in the process of developing a LBO case study for the Leveraged Buyout Model video series as a test for the content in that series. This is currently a work in process, but you can download the write up and the Excel file at the bottom of this post.
This post references an example Senior Debt Summary of Terms, which is available for download. The company described in the document is entirely fictional.
The fixed charge coverage ratio is used to measure a company’s ability to cover its “fixed charges” (largely debt-related payments but this can include additional obligations as you will see below) due in any given period. The definition provided here and elsewhere generally refers to “fixed charges,” which can be a little frustrating (akin to a dictionary defining “legendary” as “based on legends”). To clarify, we will start with a simple visual and expand on this by including the definition a senior lender might use in a term sheet.
In a control private equity transaction, debt is commonly employed to acquire a business. This debt creates obligations of interest and principal payments that are due on a timely basis. If these payments are not made creditors can take action to recover the sums borrowed by the company.