• 087 04/07/2019
    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. 
    As part of the process I have been attempting to think through what I would like an analyst to know if they were supporting me at my place of work. From my perspective, an understanding of how a transaction comes together and the legal documents required to guide the process is incredibly valuable. For this reason the case study asks the student or candidate to assume the role of an independent sponsor and use examples of senior and subordinated lender terms sheets as well as a letter of intent to pull the data required to build the financial model.
    I thought I would post this now, as a work in progress, to ask the ASM community for any additional suggestions before this goes live as part of the video series. If you have any suggestions for additional content or questions as it relates to this case study specifically please reach out through the contact page. I would welcome any feedback.
    Download: LBO Case Study
    Download: Excel File
    Related Links:
    1. A Primer on the Letter of Intent (LOI)
    2. Senior Debt Term Sheet Introduction
    3. LBO Pro Forma Balance Sheet Adjustments 

  • 086 04/01/2019
    This post references an example Senior Debt Summary of Terms, which is available for download. The company described in the document is entirely fictional.
    When a private equity group or independent sponsor is working towards an acquisition, they will ask providers of capital to submit a Summary of Terms or Term Sheet to gauge preliminary interest in financing the transaction. Once a collection of such documents have been collected, the private equity group will determine which lenders it wants to move forward with. 
    As it relates to building financial models, the most important variables to be aware of are as follows:
    1. The amount of the loan.
    2. The interest rate.
    3. The amortization schedule (defines how the loan is paid back).
    4. Whether or not there is a cash flow sweep.
    5. Financial covenants.


    Items 1 through 4 above are required to build a debt schedule (see how this is done in the Leveraged Buyout Model video series). The financial covenants are critical because they allow you to run scenarios and determine if you are in compliance with your lenders.

    Related Links: Monthly Debt Schedules Example


  • 085 03/26/2019
    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.

    FCCR Fixed Charge Coverage Ratio

    Formula from the image above:
    ( EBITDA – Capital Expenditures – Cash Taxes ) / ( Cash Interest Expense + Scheduled Debt Amortization )
    The Fixed Charge Coverage Ratio gets more precise than the debt-to-EBITDA ratio by subtracting additional uses of cash from EBITDA to get to a closer approximation of cash flow for the period. The logic behind subtracting capital expenditures instead of depreciation and amortization (the “DA” in EBITDA) is that capital expenditures are a cash outflow whereas D&A are noncash items. After that cash taxes are subtracted to arrive at a better approximation of cash flow. Interest expense is not subtracted, but it can be found in the denominator (interest expense is one of the "fixed charges").  
    To elaborate on the denominator, this calculation looks at the actual cash required to remain in compliance in each period. Since you are more closely comparing the cash available for debt payments to the debt payments required in each period, a lender typically requires that this ratio remain above a minimum threshold of 1.2x.  
    Example of what you might find in a senior debt term sheet:
    "Fixed Charge Coverage Ratio - Borrower shall not permit the ratio of (a) EBITDA minus the sum of (i) capital expenditures (excluding financed or equity funded capital expenditures), (ii) taxes, (iii) distributions, divided by (b) the sum of (i) cash interest expense and (ii) scheduled principal payments on total funded debt (including capital lease payments) to be less than 1.25x." 
    Notes on FCCR:
    1. It is not uncommon to see capital expenditures described as “unfunded capital expenditures” in the credit agreement. If capital expenditures are “funded” it suggests that additional debt was used to purchase the equipment. The debt raised offsets the cash outflow, and the interest and principal payments associated with this new debt end up in the denominator.
    2. Mandatory Debt Repayment might also be referred to as Scheduled Debt Amortization. The purpose is to include only the scheduled principal payments described in the credit agreement. Any optional repayment of debt would be excluded as would any repayment of debt under a cash flow sweep. 
    3. Finally, lease payments might also be included in the denominator with cash interest expense and debt repayment. 




Models are:
A) really boring
B) pretty sweet
C) super important
D) somewhat easy
E) kind of hard
F) fun
G) all of the above



*Answers a, b, c, d, e, f and g are all correct.