http://breakingintowallstreet.com
http://www.mergersandinquisitions.com
86
“Tenor” is just the fancy word for “How many years will this loan be outstanding?”
Each type of debt is arranged in order of rising interest rates – so a revolver has the
lowest interest rate, Term Loan A is slightly higher, B is slightly higher, Senior Notes are
higher than Term Loan B, and so on.
“Seniority” refers to the order of claims on a company’s assets in a bankruptcy – the
Senior Secured holders are first in line, followed by Senior Unsecured, Senior
Subordinated, and then Equity Investors.
“Floating” or “Fixed” Interest Rates: A “floating” interest rate is tied to LIBOR. For
example, L + 100 means that the interest rate of the loan is whatever LIBOR is at
currently, plus 100 basis points (1.0%). A fixed interest rate, on the other hand, would be
11%. It doesn’t “float” with LIBOR or any other rate.
Amortization: “straight line” means the company pays off the principal in equal
installments each year, while “bullet” means that the entire principal is due at the end of
the loan’s lifecycle. “Minimal” just means a low percentage of the principal each year,
usually in the 1-5% range.
Call Protection: Is the company prohibited from “calling back” – paying off or
redeeming – the security for a certain period? This is beneficial for investors because
they are guaranteed a certain number of interest payments.
2. How would an asset write-up or write-down affect an LBO model? / Walk me
through how you adjust the Balance Sheet in an LBO model.
All of this is very similar to what you would see in a merger model – you calculate
Goodwill, Other Intangibles, and the rest of the write-ups in the same way, and then the
Balance Sheet adjustments (e.g. subtracting cash, adding in capitalized financing fees,
writing up assets, wiping out goodwill, adjusting the deferred tax assets / liabilities,
adding in new debt, etc.) are almost the same.
The key differences:
• In an LBO model you assume that the existing Shareholders’ Equity is wiped out
and replaced by the equity the private equity firm contributes to buy the
company; you may also add in Preferred Stock, Management Rollover, or