Capital Structure (LBO) Modeling

Description

Incorporate a complex capital structure so the model can be used for credit purposes or LBO analysis

This hands-on course focuses on the skills required to build and incorporate a complex capital structure into a financial model. Participants will recapitalize a company’s balance sheet and then forecast specific pieces of debt and equity so that the model can be used for credit purposes or as a Leveraged Buyout (“LBO”) model.

Details
Prerequisites

This course builds on Building a Financial Model of a Company, so participants may want to complete that course prior to taking the Capital Structure (LBO) Modeling session.

Time

1 – 2 days, depending on the amount of material to be covered

Learning Topics

Incorporate an Acquisition or Financing into a Model

  • Build a Sources and Uses schedule within a model
  • Incorporate all fees incurred with the transaction
  • Recapitalize a company’s balance sheet

Forecast Debt and Equity

  • Properly incorporate Senior Term Debt with an amortizing repayment schedule
  • Create a robust bank operating line (or revolving credit facility) with a cash sweep
  • Incorporate variable interest rates in which the spread is dependent on the company’s leverage
  • Calculate a stand-by fee on the undrawn portion of the bank operating line
  • Utilize a margining formula to monitor the size of a company’s bank operating line
  • Incorporate Subordinated High Yield or Mezzanine Debt
  • Build a provision for non-cash Payment in Kind (PIK) interest on various pieces of debt
  • Create a well-designed shareholders’ equity schedule
  • Properly link the debt and equity schedules into the financial statements and balance the company’s balance sheet
  • Understand the need for circularity within a model
  • Make a model iterative by incorporating circular references
  • Learn to create a “circular reference breaker” to rid a model of undesirable error messages when the model crashes

Analyze Investor’s Expectations

  • Properly calculate the investor’s internal rate of return
  • Understand and incorporate operating and debt ratios
  • Include debt ratios in which the covenant tightens each year
  • Create “flags” to warn if a debt covenant has been tripped
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