IRR Statistics of Sponsor and Mezzanine Lender:
Sponsor Lenders finance the company through the bank debt because of low interest rates than the subordinated debt however;it has more heavy covenants and limitations. The bank debt requires full payback. Bank debt is of two amounts term loan A and term loan B. The two are different because of the repayment methods.
The other way of financing the leveraged buyout is high yield notes, seller notes and common equity.
The IRR of the leveraged buyout of sponsor lender is 58%, which shows that the value of the buyout will be zero on 58% and it is a positive step from the company to purchase the company. The IRR of the buyout also shows that the seller will be comfortable that the financing risk is minimal by providing the committed financing. However, comparing the buyout with the recent buyout will also give a good idea on the feasibility of the buyout.
Mezzanine financing can be completed through variety of different structures based on the objectives of the transaction and the existing capital structure in place at the company. Mezzanine lenders look for certain return, which can come from different sources.
The interest on the financing is cash based on the financing outstanding balance and the interest rate can be fixed or can fluctuate. PIK interest is a periodic form of payment where interest payment isn’t paid in cash but the principal amount increases by the amount of interest.
Sponsors use mezzanine capital in a leveraged buyout to reduce the amount of capital invested because the lenders have typically lower target cost of capital than the private equity investors.
The IRR for Mezzanine Lenders is 14.44% which is less than the IRR of sponsor lenders. It can be due to the high interest risk in the mezzanine financing. However, the funding can be used to fund a growth opportunity.
Income Statement and Balance Sheet Statistics and Ratios:
With respect to the projected income statement, the revenue of the company will grow constantly and the buyout will have no negative effect on the operations of the company, while the net income margin has also increased in the forecasted income statement. The cash in the company has also increased due to the influx of new funds into the company while the total debt compared to the company’s total debt before the buyout has also decreased.
The total debt to EBITDA ratio of the company has decreased to 4.2x, which shows that the probability of defaulting on issued debt has decreased as compared to previous years and the company will be able to service the debt in appropriate manner and this way it can also increase the credit ratings of the company. The net debt to EBITDA of the company has decreased significantly after the buyout,which shows that the buyout can be favorable for the company and might help it to perform better than before.
EBITDA to net interest expense of the company has also increased during the year, which shows that the company, over the time, will be stronger and interest expense will not cause any problems to the operations of the company, which will eliminate the risk for the company and also the investors………………………………..
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