Sage-Tips

How does Pik affect an LBO?

The PIK loan enables the debtor to borrow without having the burden of a cash repayment of interest until the loan term is ended. PIK loans are commonly used in leveraged buyout (LBO) Upon maturity or refinancing of the loan, the total amount of the original loan plus the PIK debt issued in lieu of interest is repaid.

What factors have the biggest impact on an LBO model?

What variables impact an LBO model the most? Purchase and exit multiples have the biggest impact on the returns of a model. After that, the amount of leverage (debt) used also has a significant impact, followed by operational characteristics such as revenue growth and EBITDA margins.

How does PIK interest affect financial statements?

PIK Interest in the Balance Sheet In the balance sheet, the PIK note is shown as long-term debt on the liabilities side. When less than one year is left for repaying the debt, it is shown as a current liability (i.e. as the current portion of the long-term debt).

What happens to existing debt in LBO?

For the most part, a company’s existing capital structure does NOT matter in leveraged buyout scenarios. That’s because in an LBO, the PE firm completely replaces the company’s existing Debt and Equity with new Debt and Equity. The PE firm will also have to contribute the same amount of equity to the deal (5x EBITDA).

Does PIK interest added to principal?

PIK interest is usually presented as additional securities, issuance of additional debt instruments or increases in the principal of existing debt. This $20,000 will not be paid in cash yet, rather it will be added to the principal balance, so the principal note now becomes $1,020,000.

How does PIK Toggle work?

A feature of the interest rate provisions in a loan whereby the borrower can choose to make interest payments either in cash or by payment-in-kind (PIK) and, during the term of the loan, can alternate back and forth between the two forms of interest payments within certain parameters.

What assumptions do you think the LBO model is most sensitive to?

Leverage Buyout (LBO) Analysis Con: The valuation obtained is very sensitive to operating assumptions (growth rate, operating working capital assumptions, profit margins, etc.) and financing cost assumptions (and thus LBO valuation is dependent upon the quality of the prevailing financing market conditions).

How does LBO increase value?

Financial sponsors tend to create value in LBO transactions in three different ways: operational improvements, debt expansion and multiple expansion. The first two forms concern improvements of the target’s financial and operational performance.

Does PIK interest flow through income statement?

Interest Expense Schedule Although cash interest expense will change when we add the PIK functionality, total interest expense will not change. We still have to include PIK interest in the income statement, etc. Remember PIK interest is a noncash expense, since it’s being paid with more debt instead of cash.

Who takes on debt in an LBO?

The purchaser secures that debt with the assets of the company they’re acquiring and it (the company being acquired) assumes that debt. The purchaser puts up a very small amount of equity as part of their purchase. Typically, the ratio of an LBO purchase is 90\% debt to 10\% equity.

How much debt do I need in LBO?

In a leveraged buyout (LBO), there is usually a ratio of 90\% debt to 10\% equity. LBOs have acquired a reputation as a ruthless and predatory business tactic, especially since the target company’s assets can be used as leverage against it.

Why would a company prefer issuing debt with PIK interest?

The use of PIK debt increases the debt capacity of a borrower (or issuer), enabling them to leverage up without having a negative impact on their cash flow. PIK debt gives the borrower (or issuer) flexibility, enabling them to conserve cash for CAPEX or aquisitions and to weather downturns in the business cycle.

What is a leveraged buyout (LBO)?

In a leveraged buyout (LBO), the target company’s existing debt is usually refinanced (although it can be rolled over) and replaced with new debt to finance the transaction. Multiple tranches of debt are commonly used to finance LBOs, and may including any of the following tranches of capital listed in descending order of seniority:

What types of debt are used to finance LBOs?

Multiple tranches of debt are commonly used to finance LBOs, and may including any of the following tranches of capital listed in descending order of seniority: A revolver is a form of senior bank debt that acts like a credit card for companies and is generally used to help fund a company’s working capital needs.

What are the transaction assumptions in an LBO?

In LBOs, your sources will be a mix of debt and equity financing, and your main use will be purchasing the target company (“Purchase Equity”) The Transaction Assumptions section is where we’ll calculate the transaction value / equity value. In an acquisition, “transaction value” is equivalent to “total enterprise value” (TEV).

What are realistic credit statistics for an LBO transaction?

When considering an appropriate capital structure for an LBO transaction, is it very important to target realistic credit statistics. Credit statistics that are calculated as a multiple of interest expense are called “financial coverage” ratios. * These parameters will change with market conditions.