Day 2 - Leveraged Buy-Out Modeling

This program aims to teach participants how to structure an LBO and model the financial impact of the financing structure. This session will concentrate on understanding the implications (both modeling and deal) of the finance structuring. Participants complete a fully integrated model with an income statement, balance sheet and cash flow statement.

Key topics:

• General overview of a levered transaction: what it is and basic principles
• Drivers of value creation in a levered transaction
• How leverage increases the return on equity
• What makes a good LBO candidate
• The concept of cash flow lending
• The lender’s perspective: risk, return and exit routes
• Structural subordination
• Financial instruments used in levered transactions
• Senior debt (revolving facility, term A, term B, term C)
• Second lien
• Mezzanine loans
• High yield bonds
• PIK notes
• Preferred shares, shareholder loans, vendor loan notes
• Ordinary equity
• Build a full LBO model from a template
• Main deal assumptions: focus on cash flow drivers and how to sanity-check preliminary assumptions
• Sources and uses of funds table
• Ownership structure
• Goodwill calculation
• Creating the opening balance sheet
• Deal adjustments - amortization of debt issuance fees
• Dealing with tax losses carried forward
• Calculating cash flows for debt servicing
• Setting up a repayment schedule for individual debt instruments
• Making accelerated payments using a cash sweep mechanism
• Modeling the revolving credit facility
• Dealing with the circularities created by the interest calculation
• Dealing with PIK interest
• Calculating credit ratios
• Calculating and interpreting returns to the equity investors
• Calculating and interpreting returns to mezzanine investors
• Sensitizing the outputs of the analysis
• Modeling different operational scenarios using Excel functions